Dan Lynch offers this graph:
"Definitely a correlation after OPEC kicked in," Lynch says. After 1973, I'm thinking.
Sure. Two major spikes in prices (red) match up well with two major oil price spikes (blue). And after those two spikes, there seems a lot of similarity between red and blue on the graph. Not always the size of the movements, perhaps, but definitely the direction of those movements.
On the other hand, the similarity between the red and the blue is not obvious in the years before 1973.
That's okay... That was Dan Lynch's point, I think. His graph shows the similarity after OPEC kicked in.
Again, Dan Lynch:
That said, prior to OPEC, inflation was largely influenced by employment (which is probably a reflection of how close the economy is to capacity). So in the 60's what little inflation existed was driven by employment/capacity.
Now I have a problem. Usually, I think, the explanation given for inflation in the 1960s and before OPEC is the war in Vietnam. Or, the combination of wartime spending and the war-on-poverty spending of President Lyndon Baines Johnson. Taken together, the spending on Vietnam and poverty could be considered to have pushed the economy toward capacity or beyond, so that inflation resulted. In other words, Dan Lynch's explanation of the pre-OPEC inflation is pretty much the standard explanation of the pre-OPEC inflation.
That's not the problem.
The problem is, you have to argue about capacity, dedicate yourself to capacity as a problem, and describe inflation as the result of bumping up against capacity... and then you have to suddenly change your mind and say no, no, not capacity, now oil is the cause of inflation, the price of oil.
I don't do economics that way. The cause is the cause. You don't drop one explanation and adopt another every time the wind changes direction. If you do you're describing results, not causes.
What happened to capacity, after the oil price spike? The economy went downhill:
Before the early 1970s, our standard of living doubled every generation and a half. Now it will take twelve generations for our standard of living to double!
- Ross Perot in United We Stand, 1992
Surely, capacity was no longer driving inflation! Now, instead, oil is given as the cause of inflation. The trouble with that is, all through the 1960s the general price level was rising, but the price of oil wasn't rising. So when OPEC kicked in, perhaps the increase in the price of oil was only to get oil back even with other prices again. Not my idea. It was on the news.
I heard once, during one of the gasoline-price spikes of the 1970s, that OPEC was just raising prices to make up for the declining dollar. Never heard that again, which I thought was really odd.
I recreated Dan Lynch's graph at FRED. He shows "percent change from year ago" for both oil and inflation, but he shows one on the left axis and one on the right. I want to put them together on the same axis. You get a better comparison that way.
Also, his graph runs from 1960 to 1991. I want to see more years -- especially more early years. Oh, and I want to see the original numbers. Dollars per barrel for oil, and the CPI number for the CPI.
Okay, I looked at that. There's too much of a gap between the lines. I can't see similarities and differences. So I decided to set both series equal to each other, back at some early date.
I did the "Index" data transformation for each series, setting the November 1948 value to 100 for oil and for inflation. Now the two lines are close. Identical, in November 1948.
Then, to get a better look at the early years, I ended the graph in January 1974, just as the OPEC price hikes were making an appearance:
|Graph #2: Inflation (red) and the Price of Oil (blue)|
Spot Oil Price copyright, 2014, Dow Jones & Company.
From 1958 to the blue spike at the right end of the graph, the price of oil clearly lagged behind the rising price level. Finally, in 1974, OPEC had enough of that. They raised the price of oil.
Now... What shall we say was the initiating cause of inflation? What was the prime mover? What was the original cause of inflation? Oil?
Oil was a result.