One of my most Googled post is this 2002 post on cost-push deflation. It's been flattering over the years seeing college students from various corners of the globe (a couple of Quebec students came by today) and London finance types give it a look-see.
However, it has just short of 14 years since I wrote that, a simpler time and place. Some things are worth revisiting.
A quick review of basic microeconomics will be a starting point. "Cost-push inflation" is econ-speak to describe the stagflation of the late 1970s. Oil prices went up partly because of a weaker dollar as the Bretton Woods system that had the dollar worth a given amount of gold collapsed and partly due to OPEC coming of age and flexing its muscle. That caused the cost of doing business on products needing oil to make or deliver to go up.
Producers then raise prices to try and pass on the added costs, which lowers the quantity demanded of the products. Sales go down, prices go up, and when you apply that across the economy, you see higher inflation and reduced GDP (or GNP, since GDP wasn't our go-to stat back then) once you factor out inflation; fewer widgets are getting sold. Inflation and a stagnant economy, or "stagflation" as it became known.
What happens if "factor prices" that make up the cost of making stuff like, oil of the cost of labor, goes down? Businesses see their costs drop and pass some of that on to consumers. Prices fall, unit sales rise, real GDP goes up and everybody says amen. Well, everybody but atheists and the folks selling those factors, as they're taking a hit.
Oil prices have gone down on balance since the financial crash of 2008. Some of that was due to an economic slowdown/recession that kicked in the late aughts and some of that was due to added oil supply coming on line in North America, as new production techniques such as "fracking" increased US and Canadian oil productions.
Wages are a major factor price, and a rather stagnant labor market has kept the costs of labor relatively low. While unemployment rates have come down to lower levels, a lot of folks have stopped bothering to look for work, and you have to be looking to work to be considered unemployed. That, and the number of part-time workers, understate the poll of prospective workers, making the labor market much less tight than the simple unemployment rate state would indicate.
As long as external factors, such as a disruption in Persian Gulf oil deliveries due to any number of regional issues (the wars in Yemen, Syria and Iraq, Iranian relations with the US and Saudi Arabia) or political factors, like an increased minimum wage or a government meltdown throwing the country into disarray, are kept in check we might well be seeing lowish factor prices helping keep inflation in check.
However, those bleeping external factors are likely to crop up. Pray that they don't.
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