That '70s inflation show: Surging oil reignites U.S. inflation

Posted May 20th 2008 3:10PM by Joseph Lazzaro
Filed under: Bad News, Economic Data, Commodities, Oil

The April 2008 producer price data indicated that inflation, as measured at the business or wholesale level, is accelerating. But investors and consumers shouldn't be surprised, so says economist David H. Wang.

"It's beginning to look like a re-run of a show we don't want to see, 'That 70s inflation show,' " Wang said. "Oil is increasing inflation throughout the U.S. economy and you can really see it at the producer level."

During the past 12 months, producer prices have increased 6.5% and the core rate has risen 3.0%, according to U.S. Labor Department data released Tuesday. Other producer price index surges occurred in 1974, 1980, and 1991. What do the three have in common? You guessed it. They were periods when the price of oil increased by a large percentage, Wang said. The 1991 event was more of an oil spike, but the other two were the first two oil shocks, in 1973-1974 and 1979-1980, he said.

Oil's current march higher, up 100% in the past 12 months to about $129 per barrel, and up about 480% since 2002, does not qualify as an oil shock just yet, but it's close and getting there, Wang said, and inflation has trended higher in tandem with oil's latest run-up.

The oil nexus

Wang notes that while the United States economy is much more energy-efficient in 2008 than it was in 1974, 1980 or even 1991, "oil remains intertwined in the American economy." Moreover, although increased demand for food in the developing world is a major factor in increased grain and food prices, oil and energy plays a role there, too, due to oil's use in food transportation.

But that's not to say oil is the only factor in the rise in producer prices. Higher employer taxes, health care costs, and insurance costs have also contributed to higher producer prices, but the relationship between higher oil prices and higher producer prices is strong, he said.

How has the nation coped with the periodic surges in oil-driven producer prices? "By substituting cheaper raw materials or methods and by becoming even more efficient," Wang said. The nation is already searching for, and in some case using, lower-cost substitutes and methods, he said, but "has to play catch-up" regarding increased efficiency.

Tags: 1973-74 oil shock, 1979-80 oil shock, energy, featured, inflation, oil, oil prices, oil shock, PPI, producer price index, U.S. Labor Department