Higher Oil Prices and Inflation

Higher oil prices are leading to higher costs. As marginal cost curves and supply curves shift upward, prices of goods that use petroleum will be rising. From the Times Online [h/t to SC]:

HIGHER oil prices are exerting significant upward pressure on inflation, official figures are set to show this week.

... They will be followed by the consumer prices index (CPI) on Tuesday, which is expected to show inflation rising even further above the government’s 2% target. Analysts expect an August rate of 2.4% or 2.5% this week, from 2.3% in July, and warn that this is unlikely to be the peak.

“Worse lies ahead for the September CPI, which could be close to 3%,” said Michael Saunders at Citigroup.

It is true that as oil prices rise, they will contribute to the overall rate of inflation ----- in the short term. But this effect will be transitory unless central bankers foul it up.

It will be easy to blame oil prices and oil producers and OPEC for the inflation, but that inflation will persist only if it is ratified by the monetary authorities.

To quote my retired colleague, David Laidler, "A lasting, persistent inflation is always the result of increasing the money supply too rapidly." And M2 in Britain has been growing at an annual rate of more than 11% recently.