Friday, December 19th, 2008
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There is always a certain sense of satisfaction when economic scenarios play out as expected. In the spring of 2007, I predicted a recession would start before the end of the year (see: Warning: Recession Ahead). I identified the basic cause in March, 2008 (see: A Few Words on the Economy), and discussed the impact of the recession in May, 2008 (see: Yes Virginia, This Is A Recession). Then in early December, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) confirmed my start date. Recent events confirm the rest.
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Thursday, December 11th, 2008
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Just for the fun of it, I calculated the month to month change in the price of American gasoline (all grades) versus the month to month change in the Consumer Price Index (CPI-U), from January 2004 through October, 2008. Although the correlation is not perfect, it does show how the rate of inflation tracks the price of gasoline (and the oil from which gasoline is made). The left scale of the following chart shows the month to month change in CPI-U as reported by the Department of Labor, Bureau of Labor Statistics (BLS). The right scale shows the month to month change in the price of gasoline as reported by The Department of Energy (DOE).
This is important stuff. Although the annual change in the average price of gasoline versus the annual change in the CPI have a lower correlation, the long term trend for the price of oil (and hence gasoline) is UP. Unless we humans find an alternative source of low cost fuel to replace the portability and high energy content of oil, the long term outlook for inflation is also UP. As shown by this chart, the price of oil has been (and will continue to be) volatile. We can assume the rate of inflation will be equally volatile. Since the price of oil will become an increasingly important component of what happens next to the world economy, the development of alternative (lower cost) energy options assumes increasing importance.
TCE
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