Who’s Afraid of a Little Inflation?
Media perpetuate the myth that oil prices have driven up inflation, ignoring the many differences between today and the 1970s.

By Amy Menefee
Free Market Project
Oct. 26, 2005
 

     “Because we think that higher oil prices caused double-digit inflation in the 1970s, we fear it could happen again,” Newsweek contributing editor Robert J. Samuelson wrote in the October 31 magazine. “The trouble with this impeccable logic is that the underlying facts are wrong.” Samuelson explained that rising oil prices merely added to an already-problematic inflation level at the time.

     NBC’s Brian Williams also hearkened back to the earlier era on the October 14 “Nightly News.” “Tonight, the lead story is the economy,” Williams said. “It has to do with inflation, and the news is bad. In fact, you’d have to reach back to the Jimmy Carter years to find a rate of inflation any higher than that announced today …” Yet, in the report that followed, Tom Costello said that while gas prices were a factor in people’s budgets, “it is also true that across the economy, inflation is relatively tame.”

     Costello was right. Free-market economist Larry Kudlow detailed several reasons why today’s situation doesn’t resemble the ’70s in a Washington Times column on September 8. For starters, today’s economy is growing and businesses are showing real profit gains, while the ’70s faced a recession. Now the United States enjoys more than 20 years of deregulation, making the economy more “flexible and resilient,” Kudlow said. The increased globalization of communications and business keeps information flowing and prices relatively low through competition.

The Worry of Energy Prices

     Nationally, gas prices have now dipped below pre-Katrina levels. But the recent fluctuations in gas and crude oil prices have had the media in fits. And they have warned that energy costs are causing general inflation, even though gas prices alone have dropped 15 percent since September 5.

     CNN’s Jack Cafferty said on the October 22 “In the Money”: “We got some inflation numbers on the radar that are potentially troubling, energy prices feeding into those obviously.” CNN correspondent Christi Paul said on the October 18 “Newsnight with Aaron Brown” that inflation had risen and “Energy prices, forced higher by the Gulf Coast, hurricanes, seem to be behind that jump.” ABC’s Geoff Morrell said on the October 16 “Good Morning America” that “soaring gas prices drove inflation to its highest monthly rate in 25 years.”

     On “The Big Story with John Gibson” October 5, Fox News’ Terry Keenan followed the weather report with: “…a different storm brewing, John. And this one is on the inflation front.” Keenan said that “with rising oil prices and rising health care costs, tuition costs, insurance costs – I can go on and on – inflation is starting to percolate through the system.”

     The problem with those warnings, said Cato Institute economist Alan Reynolds, is that they amount to “a dangerous myth.” “There is no evidence that energy price spikes have ever led to higher non-energy inflation,” Reynolds wrote in an October 20 column. In fact, Reynolds said, higher energy costs can actually have a deflationary effect on most non-energy prices for consumers. In a September 15 piece, he referred to his writings from 1974, when he said that “if consumers pay more for gasoline, they have less money left over to bid up the prices of other things.”

     CNN’s Christine Romans and Andy Serwer attacked that reasoning on the October 16 “In the Money.” In a discussion of the Consumer Price Index, which revealed that general inflation was not as worrisome as they thought, they distracted viewers from the economic facts. Instead of explaining that price spikes in certain sectors do not constitute general inflation, they insisted otherwise. Romans said, “What I think is interesting is that when you strip out food and energy, CPI wasn’t as bad as Wall Street had thought and what I say, is can you strip out food and energy in your budget? I don’t think you can strip food and energy from your budget.” Serwer rejoined: “I love the fact that economists don’t eat or drive. That always cracks me up. It’s interesting, I think. There is inflation and you know if the Federal Reserve is concerned about inflation, why shouldn’t we be?”

     Apparently, Serwer had already forgotten the lessons that John Rutledge gave him on the October 8 edition of “In the Money.” Rutledge, an economist and chairman of Rutledge Capital, schooled the CNN team on inflation. CNN’s Susan Lisovicz repeated the familiar mantra that “Inflation is coming from the higher energy prices.” But Rutledge said the Fed needed to “let this price level go up one time” because “inflation is held down by China, India wages and prices.”

     Serwer pressed him: “Come on, inflation is definitely a problem. There’s no question that Katrina and Rita are causing prices to rise. I don’t see how you can say that inflation is not a problem. I mean you see higher energy prices, higher gas prices. … How can you say there’s no inflation?” Rutledge answered: “Andy, you said two different things. You said there’s an inflation issue and there are energy raising prices. Those are different statements.”

     Rutledge explained that “inflation” originally meant “printing too much money and devaluing the currency. That’s not what’s happening now.” He described price increases in various sectors as “one-time bumps” and added that “the Fed is not going to make oil cheaper by tightening interest rates.” Rutledge continued: “We have a $13 trillion GDP, we have a $155 trillion asset base in the United States and no one, not Alan Greenspan, not the Federal Reserve, not Katrina, not Rita, are going to knock that over.”