As U.S. consumers are grappling with historic levels of price inflation across nearly every category of goods and services, attempts have been made by
the media and politicians to assign blame on a diverse set of factors, including the Russia-Ukraine conflict, supply chain instability, and most
importantly, the COVID pandemic.
The aim of this post is examine the current bout of inflation we're dealing with here in the U.S., and to highlight the very strong correlation this
inflationary period has with a rise in the price of hydrocarbon-based commodities, e.g. oil, natural gas. The tacit assumption, which won't be
discussed in detail, is the very contentious policy the current POTUS and his administration have adopted towards fossil fuels and the portion of the
energy sector dealing with oil/natural gas.
While it's probable that this inflationary phenomenon we're experiencing extends beyond the U.S., here we focus only the expression of price
inflation in the U.S., mainly because the available data we have at our fingertips to investigate this comes from the site
bls.gov. There's plenty of useful info on
this site, if you're interested in poking around and researching this yourself.
First, lets look at the the leading commodities among the categories that experienced extreme price inflation over the past 24 months. If you've been
paying attention to the granular trends in price inflation, it shouldn't surprise you that the commodities with the most share price inflation are
energy and oil/gas products:
I've included the price trends in the graph for other commodities (food, apparel, medicine) to provide a comparative view of how pricing for other
goods/services have been trending over the past 48 months.
A few things should jump out at you in looking at these charts.
Number one, notice the sharp, exponential jump of pricing for gasoline, oil, energy.
In contrast with the pricing of commodities listed, we can see that the price of gas/oil/energy has essentially a
parabolic slope in its price
rise, whereas the other commodities (in the red box) are growing at much slower and gradual, likely linear rate.
It's a well-known and fundamental property of economics that, if a major influx of currency is injected into an economy, without an increase in
GDP/output, this will lead to price inflation. Simply put, increasing the available pool of money in a system
without a corresponding increase in
productivity/manufacturing/creation means there is more money to go around to use for buying the same pool of "stuff" that's available for
sale. If scarcity drives value, then the inverse (abundance) lowers value, in this case, dollars. Capitalism 101.
With that understanding, it is a valid and reasonable observation that the recent "COVID stimulus" tranches injected more money in the U.S. economy,
and could be a driver of inlfation. However, let's look at the
timing of
the rounds of stimulus:
- First round, from the CARES Act, March 2020
- Second round, from the Consolidated Appropriations Act, December 2020
- Third round, from the American Rescue Plan Act, March 2021
So, in turning back to our CPI graphs, we'll notice that
the timing of stimulus tranches doesn't neatly align with major jumps in inflation.
For non energy/fuel commodities, we see that the upward trend in pricing seems to have began around May 2021, which is more than a year after the
first COVID stimulus went out.
One could argue, "Hey, the ripple effect of currency dilution is not instantaneous; it'll take a little while to manifest in pricing". This is a
pretty reasonable assumption, but, if we turn our focus to the CPI charting of energy/fuels,
we see that around early 2020, these commodities
transitioned from negative inflation trends to a positive increase, and a very steep one at that. Cross referencing the general commodity price
index, we see that the marked price growth trends didn't really start to take off around mid-2021, which just so happens to match the peak price
growth for the energy/fuel commodities. So, based on timing, the data seems to indicate that the sensitivity in price increase in general consumer
categories is more attuned to fuel price than the COVID stimulus schedule. If not,
then why didn't we see positive price slopes ramping up more
dramatically throughout and immediately after the injection of currency from the COVID relief stimulus checks?
While it certainly makes sense to lump the COVID stimulus packages as inflation drivers, to a degree, the data indicates that rising fuel prices are
a more impactful force in driving prices of other commodities up. This is a very rational deduction:
oil prices dictate the prices of nearly every
sector of the U.S. economy. When goods are transported long distances from origin to the the consumer, a key property of the "Just In Time"
supply chain model, the further the distance traveled, the more fuel is consumed. The greater the price of fuel, then logistic companies need to raise
rates to transport the goods, and the manufacturer/producer is simply going to raise their prices to compensate for higher shipping rates.
Particularly of note: this isn't just applicable to shipping a finished, ready-to-use product to the consumer,
but it involves every component,
ingredient, element that goes into creating a product. So if you buy a Dell computer, and Dell is sourcing it's motherboard from Taiwan, disks
from Vietnam, chassis/plastic components from China, YOU are going to foot the bill for the increase in shipping price that Dell incurs from
assembling the raw materials it needs to build your computer. Speaking of raw materials, it may not be widely known,
but refined oil/petroleum is a key ingredient to a
wide, wide gamut of manufactured goods, basically anything containing plastic or polymers. So on top of the price increase for shipping, the
actual materials that go into producing everything from tires to PCs to car parts to toys and everything in between, will cost more to fabricate,
because the price of a key ingredient (oil) has gone up.
In conclusion:
- yes, the COVID stimulus programs were definitely going to drive inflation, and this was mentioned and highlighted here on ATS
-
when we look at the CPI and pricing data, it's clear that a more critical contributor to price inflation is the price of oil/energy
- the political connotations and considerations are left to you, the reader, to ponder
- HINT for previous question: overlay the CPI inflation data on election calendars and see if you can find a link, most especially, in conjunction
with the current administration's stated goal of diminishing the use and availability of hydrocarbon based fuel in the U.S.