Home > Finance Theory, Inflation, Media Hype/Myths, US Economy > Inflation Isn’t Necessarily Higher Prices

Inflation Isn’t Necessarily Higher Prices

 I hear a couple arguments about inflation and oil prices lately.

  1.  Higher oil prices force folks to spend more money on gasoline, and therefore less money on other things, which hurts their disposable income.
  2. Higher oil means higher inflation.

It’s very unlikely both these statements can be simultaneously true. Yet people believe it.

The reason is that inflation is a function of too much money chasing too few goods. Said another way, inflation is a monetary phenomenon. So, if it’s the case that higher oil prices are impinging the ability to spend on other things, that probably means it’s not inflationary because it’s not a case of too much money chasing the oil to higher prices—it couldn’t be if folks have to cut back on other things to buy it. Instead, higher prices in stuff like oil and agricultural goods is due to tight supply. Supply is not an inflationary thing.

Note that housing, electronics, and a host of other things are falling in price—largely offsetting price increases in individual things like commodities at the moment, keeping overall inflation low. Inflation isn’t always a matter simply of higher prices.

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