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Price of Oil vs Inflation

Can We Afford What We Could Before?

May 12, 2006

Inflation is the loss of purchasing power. Most people understand that higher prices mean you can buy less with a given amount of money but Bob Brinker says otherwise.

5/12/06: Price of Oil and Inflation

Bob Brinker says Ben Bernanke, the chairman of the Federal Reserve, has it wrong. Bob Brinker says higher priced oil is not inflationary. In his April 30th, 2006 monologue, Bob Brinker said:

"We have kept you informed what is really going on in the world of inflation, which is virtually nothing. As you know, oil prices have skyrocketed and are now setting up near all time highs in the low $70s. Oil prices literally going through the roof, and yet to the consternation of many, not listeners to Moneytalk, but to many, including, apparently, the Fed Chairman, they think oil prices are inflationary. That's because they don't understand, they don't understand the taxing effect that these higher gasoline prices have on your pocketbook. As we've discussed on the program, the vast majority of people in America today cannot even afford to fill up their gas tank. They can't put the $40, $50, $60, $70 worth into their gas tank because they don't operate on a budget like that. Sure, there are some well-heeled that can do it and not care very much about it, but the vast majority of Americans cannot even afford a $40, $50, $60, $70 fill-up on a regular basis-they just can't afford it.

You can read more of what Bob Brinker said about inflation here.

Perhaps Bob Brinker's listeners really cannot afford to fill their gas tanks but I see little difference between Brinker's low-income listeners paying more for gasoline or for rent. An increase in either gasoline or rent is inflationary because it is the total spending and how much you get for it, purchasing power, that matters. If the poor can't afford increases from inflation then they usually downsize their standard of living such as moving to a cheaper apartment, taking the bus rather than driving or eating cheaper food. Some will even get a second job to "make ends meet." The middle class usually saves less and those of us who can afford it, we might give less to charity or spend less on our luxuries. One thing remains constant, higher priced gasoline means we all can't afford what we could before unless we get a raise to compensate for higher prices.

Inflation is near 15-year highs. I have charted the price of Oil and Inflation between 1994 and today here. From the charts, you can see that the ups and downs for inflation seem well correlated with the price of oil. To argue otherwise seems rather foolish to me.

Take our Poll

Do you agree with Ben Bernanke and I when we say higher prices for anything, including commodities, are inflationary? Alternatively, do you agree with Bob Brinker who says higher priced oil is not inflationary?

Please take our poll Higher Priced Oil and Inflation on the main page (scroll down for the Poll Questions.)

I agree with Kirk and Ben Bernanke. Higher priced oil is inflationary.
I agree with Bob Brinker. Higher priced oil is NOT inflationary
I don't have a clue. Please pass the beer.

Discuss this Poll and Bob Brinker HERE.

Free Charts and Other Stuff

Since beating the market is hard for most to do, I recommend a "Core and Explore" approach to investing. Core means place 80 to 99% of your money into a CORE, buy-and-hold, no load, mutual fund portfolio and then EXPLORE with the remainder. To build your core portfolio, I suggest a diversified basket of index funds. For the remainder, read more about it in my profile here

I welcome suggestions for future articles at Kirk's Market Thoughts.

Kirk Lindstrom:

DISCLAIMER: Answers & my words are general in nature, are not meant as specific investment advice, and do not necessarily represent the opinion of anyone but Kirk. Individuals should consult with their own advisors for specific investment advice.

The copyright of the article Price of Oil vs Inflation in Investment is owned by Kirk Lindstrom. Permission to republish Price of Oil vs Inflation in print or online must be granted by the author in writing.