"A surge in oil prices results in a change in relative prices, with the price of oil going up relative to the price of other goods and services. But the higher relative price of oil does not cause the overall inflation rate to pick up. That can only occur if the money supply picks up. After all, inflation is always and everywhere a monetary phenomenon."
"While it's true that each oil crisis was accompanied by inflation in some countries, that doesn't mean that a surge in oil prices caused their inflations. In the U.S., the inflations of 1973-75 and 1979-81 were generated by prior surges in broad money, as measured by the growth of M2, the term economists use for the 'money supply' in the economy, during the two to three years preceding the outbreak of each inflationary episode."
Higher oil prices create shifts in relative prices between oil and other goods, but do not independently cause overall inflation. Inflation fundamentally requires an increase in the money supply. The widely accepted narrative attributing 1970s-1980s inflation to oil crises is incorrect. While oil price surges coincided with inflationary periods following the 1973-74 Yom Kippur War and 1979-80 Iranian Revolution, correlation does not establish causation. Analysis of U.S. inflation episodes in 1973-75 and 1979-81 reveals that prior surges in broad money supply (M2) during preceding years generated the inflation, not the oil crises themselves.
#oil-prices-and-inflation #monetary-policy #economic-misconceptions #money-supply #1970s-stagflation
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