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Wednesday, January 16, 2008

If oil prices are skyrocketting, why are non-energy prices stable?

I think the answer to the title questions lies in the fact that we are experiencing a simultaneous decrease on both the supply and demand side. Hence, other than certain necessity items (like food), soaring gas prices have not had a trickle effect on other prices in the economy because while the gas prices can have an effect on our economy's output of goods, we are simultaneously experiencing a demand-side malaise led largely by negative perceptions due to: the Iraq war, media pundits proclaiming a huge economic crisis, a declining dollar, middle class real-wage stagnancy, and the bubble burst in the housing market, etc.... The demand side shift is tending to keep prices down just as high gas prices and falling supply is pushing prices up.

The result is that core inflation is not rising as one might expect from higher oil prices. All of that matters little. The point is that national output/expenditure is likely to grow at a snails pace (if you are an optimistic economist) or may even dip into negative growth (if you are, like me, less than optimistic). High prices or low prices, that's bad news. But there is one saving grace - and that is the stagnant prices give a little more breathing room to Bernanke and friends.

5 comments:

T.Pettinger said...

Also improvements in technology have helped reduce costs of many white goods. Also an inflation rate of 2% may hide big differences in inflation for different types of goods. Energy prices in the UK are rising by 8%, but some goods are falling in price.

Regards,

Tejvan
www.economishelp.org

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