Inflation Worries! Shocking, I tell you. Shocking!
Rising energy costs are causing Americans to pay more for such diverse products as cat litter and express delivery services, sparking concerns that protracted inflation might be returning as a primary threat to the U.S. economy for the first time in more than a decade.
Signs of higher inflation are beginning to multiply across the economy. Clorox Co. said this week that it would boost prices on almost half its products, on top of increases already announced for its food containers, trash bags and liquid bleach.
I ranted about this topic at length back in March. Click on the link to read the whole post if you're so inclined. A brief summary follows...
Back in March markets and economists ,etc., were saying they didn't see inflation on the horizon. This was at a time when a barrel of oil cost roughly 40% more than it had a year prior and it's shot up since then. Sure, some of it has to do with refineries getting jammed up from the Hurricanes on the Gulf Coast. Nonetheless, if you take away the price spikes directly related to refining capacity you still have what has become around a 55% increase in the price per barrel.
This ain't just about gasoline, although that's a huge component of it since everything we buy is transported using a petroleum product. But it goes deeper than that...the computer you are reading this on is primarily a petroleum product. Kitty litter as mentioned above is a petroleum product. Petroleum is a factor of production in EVERYTHING. Really. Whether it's a core manufacturing component or a rapidly expanding transportation cost it is a factor of production in EVERYTHING. The tires on your bicycle? Petroleum product. It's in everything.
And it keeps getting more expensive.
So inflation is rising.
And media, pundits, investors and even economists who should know better are acting surprised.
When a factor of production increases in cost the price goes up. When a factor of production that hits everything we buy goes up all prices go up. When the cost of a factor of production goes up supply goes down. When supply goes down, price goes up as a commodity becomes more scarce. As supply goes down and demand decreases at a less rapid pace, price goes up even more.
Yeah...markets responding to this is in fact rational. But they're seven months late, minimum, to the dance.
Efficiency. See how it works for you.
The short term news is ghastly. Ongoing upward movement in energy prices will hurt everyone. Long term, it's likely a good thing (NOTE: This does not in any way make the short term easier to bear). If we do not artificially hold prices down through subsidies and tax breaks but let the competitive horizon remain nuetral, rising petroleum prices will make alternative fuels more attractive to investors and consumers. Given that even if we open ANWR to drilling it will cut the price per gallon of gasoline at best $0.06, and given that the countries that have the most oil are generally politically or economically unstable (Middle East, Venezuela, Russia) alternative fuels finally becoming competitive in the market place would have a long term stabilizing effect for the US economically and politically.
But getting there is gonna suck.
UPDATE: Read the whole thing here...
Wall Street on Wednesday suffered its worst one-day drop since April, as a potent mix of worries over the economy, inflation and corporate earnings drove more investors to the exits.
One trigger for the sell-off was a report showing that the services sector of the U.S. economy slowed sharply last month, while many services companies said they were facing rising costs because of high energy prices.
The report raised the specter of growing inflation pressures amid a weaker economy — potentially a recipe for the "stagflation" that characterized the 1970s, a dismal decade for financial markets.
Most economists say it's too early to fear a return of stagflation, but many agree that energy prices pose a big enough inflation risk that the is certain to continue raising short-term interest rates.