When Will Inflation Hit? Oil Prices May Hold a Clue

By Irene Aldridge

Over the past three years, much of the online and cocktail party chatter has buzzed around the when to expect inflation. Everyone has long agreed that high inflation is inevitable, gold ETFs have been snapped up and prices driven to the sky by hedgers, yet month after month the level of inflation remains precariously low. According to the quantitative determinants of inflation the Fed adjusts money supply in response to oil prices, as such, with rising oil prices we can expect the Fed to take measures to reduce inflation expectations.

Inflation is a function of many variables, with the amount of money put into circulation by the Federal Reserve ranking high in its importance. In fact, a quantitative analysis shows that for every US $50 billion hike in the U.S. monthly money supply (an average change in money and its equivalents), annualized inflation rate increases by over half of a percent. The increase in inflation, however, does not happen instantaneously, but is delayed by two months.

Figure 1 shows the cumulative increase in the U.S. Money Supply enacted by the Fed over the past two years. As Figure 1 shows, there has been nearly half a trillion dollars pumped into the financial circulation over the past year alone. This rise may halt, however, as another factor is playing an important role in the Fed’s determination of whether to keep the money faucets open: the price of oil.

Indeed, as the Fed Chairman Ben Bernanke has stated, high oil prices may hamper economic recovery. Combined with high inflation, high oil prices may bring the U.S. economy back to the brink of the recession. As another quantitative analysis shows, the Fed really means what it says: the money supply is inversely related to the oil prices observed in the previous month. Following a monthly rise in the oil prices, the Fed tends to cut down its money supply, keeping the lid on the inflation. With the current political uncertainty in the Middle East driving up prices on oil, it is likely that the inflation will just have to wait until the political situation in the oil-rich region stabilizes and oil prices go back to normal levels.

4,723 Comments

  1. Oh my goodness! Amazing article dude! Many thanks, However I am having difficulties with your RSS. I donít know the reason why I cannot subscribe to it. Is there anyone else getting identical RSS issues? Anyone who knows the answer can you kindly respond? Thanks!!

  2. Itís hard to find well-informed people in this particular topic, however, you sound like you know what youíre talking about! Thanks

  3. Enjoy meeting dozens of people with free chat and chat rooms



  4. You ought to be a part of a contest for one of the greatest blogs on the net. I will highly recommend this web site!

  5. After study a few of the blog posts on your website now, and I truly like your way of blogging. I bookmarked it to my bookmark website list and will be checking back soon. Pls check out my web site as well and let me know what you think.

  6. Howdy! I just wish to offer you a huge thumbs up for the great information you’ve got here on this post. I’ll be coming back to your web site for more soon.

  7. A fascinating discussion is worth comment. I do think that you need to publish more on this subject matter, it may not be a taboo subject but typically people don’t talk about these subjects. To the next! All the best!!

  8. After going over a few of the articles on your site, I really like your way of writing a blog. I added it to my bookmark site list and will be checking back in the near future. Take a look at my website too and tell me how you feel.

  9. I need to to thank you for this very good read!! I definitely loved every bit of it. I have you saved as a favorite to check out new stuff you postÖ


  10. This blog was… how do I say it? Relevant!! Finally I have found something that helped me. Cheers!

  11. Great post thank you. child porn , Google porn , sex izle , Baby porn

  12. Having read this I believed it was very enlightening. I appreciate you finding the time and energy to put this informative article together. I once again find myself spending a significant amount of time both reading and leaving comments. But so what, it was still worth it!

  13. You need to take part in a contest for one of the most useful sites online. I most certainly will recommend this website!