Letter to the Editor

Energy prices don't cause inflation

Saturday, July 19, 2008

To the editor:

"Inflation Surges on Energy Prices" trumpeted a Wall Street Journal headline Wednesday. From the AP the same day, "Consumer prices shot up in June ... with two-thirds of the surge blamed on soaring energy prices." A week before, the Missourian ran an article on the inflation in Saudi Arabia. While Saudis are only paying 45 cents for a gallon of gasoline, "inflation that has hit 30-year highs on everything else in the kingdom is making Saudis feel poorer despite the flush of oil money." Today's headlines suggest that the rise in oil prices causes inflation in the U.S. Last week's headlines reveal double-digit inflation in an economy where gasoline sells at a price the U.S. hasn't seen in nearly 40 years.

This begs the question "Do rising energy prices cause inflation?" The answer is unequivocally no.

What happens when farmers experience a bumper crop? Grain prices go down. What happens when the Federal Reserve produces a bumper crop of dollars? The price of the dollar (i.e., its value relative to everything else) goes down. We see this decline directly when it takes more dollars to buy foreign currencies. We see the euro price of the dollar fall, the pound price of the dollar fall. ... Domestically, a fall in the price of the dollar means higher prices for goods and services (and gasoline). The fact that these changes occur neither immediately nor simultaneously allows the Fed to avoid any blame.

PETE KERR, Cape Girardeau