Friday, August 31, 2007

Long-term Inflation

In an attempt to see the forest through the trees here's a chart of the CPI-U's change over the previous five years (annualized). Granted, if the trend changes quickly this isn't the best chart to see the change. However, who says the trend is going to change quickly? Does anyone really know?

About the only thing that seems to bring the inflation trend on this chart down once it starts up is a recession. 1981-1982? Yep. 1990-1991? Yep. 2001? Well, sort of. Get the microscope out. So if I had to guess, and that's all it is, it looks like we're going to need a recession if we want inflation to really start coming down again.

Who knows though? Maybe I'm just blowin' smoke. Smoke generated from burning oil that is. $74 oil. Oil that only averaged $58.30 in 2006. Oil that was $46.47 in 2005. Oil that was $38.93 in 2004. Oil that was $27.54 in 2003. Oil that was $22.51 just five years ago. Oil that is excluded from "core" inflation when determining inflationary trends because it is so volatile. Oil that's used to fertilize and harvest our food (which is also excluded from the "core" when determining inflationary trends). Oil that we rely on from other countries since production peaked here in the states. Oil that's currently positioned under our Army's feet in Iraq as if by some miraculous coincidence. Yeah, that oil.

I'm not saying that we're clearly reaching peak oil right now. Our production peaked here in the USA though. There is a precedent. All I'm saying is that it would be nice to know. If we are peaking on a global scale, we can pretty much throw the whole idea of tame inflation right out the window. Yeah, yeah, I know. Inflation is purely a monetary phenomenon. Oh how that sentence tires me. Inflation is not necessarily just a monetary phenomenon. It is caused by too much money chasing too few goods. Either too much money can be printed OR too few goods can be made. Running out of oil implies too few goods, especially when it comes to food.

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