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first and second round effects of external prices rises on inflation
But price rises will show up in measures
claimed to reflect inflation, such as RPI or CPI indices. Thus, such
indices reflect both inflation and external price
rises.
Higher external commodity prices such as energy
prices also have the potential to put downward pressures on living
standards.
“[...] economists have struggled to understand the ways
that disturbances to the supply and demand balance in energy markets
influence economic growth and inflation [...]”
—
“Compounding these difficulties in markets for crude oil have
been constraints and disruptions in the refining sector of the energy
industry. In the wake of Hurricane Rita, one-quarter of domestic
refining capacity was offline, and here, too, the period of recovery
has been protracted. Even before last year's hurricanes, however,
a mismatch appeared to be emerging between the incremental supply
of crude oil, which tended to be heavy and sulfurous, and the demand
by refiners for light, sweet crude, which can be converted more
easily into clean-burning transportation fuels. These developments
have highlighted the need for additional investments in refining
capacity to bridge the gap between upstream supply and final demand.”
The talk includes useful summaries of oil and gas
markets.
“[...] Because the United States imports much of the oil
that it consumes, an increase in oil prices is, as many economists
have noted, broadly analogous to the imposition of a tax on U.S.
residents, with the revenue from the tax going to oil producers
abroad [...]”
Those first and second round effects:
“[...] The rise in prices paid by households for energy--for
example for gasoline, heating oil, and natural gas--represent, of
course, an increase in the cost of living and in price inflation.
This direct effect of higher energy prices on the cost of living
is sometimes called the first-round effect on inflation.
In addition, higher energy costs may have indirect effects on the
inflation rate--if, for example, firms pass on their increased costs
of production in the form of higher consumer prices for non-energy
goods or services or if workers respond to the increase in the cost
of living by demanding higher nominal wages. A jump in energy costs
could also increase the public's longer-term inflation expectations,
a factor that would put additional upward pressure on inflation.
These indirect effects of higher energy prices
on the overall rate of inflation are called second-round effects.”
—
“The overall inflation rate reflects
both first-round and second-round effects. Economists and
policymakers also pay attention to the so-called core inflation
rate, which excludes the direct effects of increases in the prices
of energy (as well as of food). By stripping out the first-round
inflation effects, core inflation provides
a useful indicator of the second-round effects of increases in the
price of energy.”
—
“[...] The market for alternative fuels is growing rapidly
and will help to shift consumption away from petroleum-based fuels.
Government can contribute to these conservation efforts by working
to create a regulatory environment that encourages the growth in
energy supplies in a manner that is consistent with our nation's
environmental and other objectives. Given the extraordinary resilience
of the U.S. economy, I am confident our nation will be up to this
challenge.”
That is, substitution could work to offset pressures
on fossil fuels.
He is not the genius that Alan Greenspan is, but
he looks like a good solid workman and doubtless experience will grow.
someone will get me paranoid!!
Ron Paul went into questioning Bernanke at the
Joint Economic Committee of the US Congress presentation. He did something
unusual among politicians. He spoke as if he understood money.
The programme broadcast of the questioning of Bernanke
inconveniently broke at that point.
Since that time I have been chasing around for
a transcript, thus far without success.
I have seen Paul’s interaction referred to as ‘a rant’,
all the time without real transcript of his comments.
I did find a link to a video of Paul’s questioning,
but when I went to call it, I found that it had been removed!!
Persisting, I have come up with other video links
from earlier Paul-Bernanke interactions:
Here are a couple of them - highly recommended:
[3:34 minutes]
[5:37 minutes]
Note carefully Bernanke’s response in the
second video.
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