Real Oil Prices and Inflation

People like to blame oil prices for causing inflation even though it is the other way around, with money supply growth causing inflation. This graph shows the relation between nominal oil prices, real oil prices and the normalized US CPI inflation rate. Very close correlation between oil prices and inflation. Two main exceptions: the increased demand from China post-WTO entry in Dec. 2001, up to the 2008 crash, and second, the sterilization of reserves through the Fed suddenly paying interest on reserves for the first time in history, from 2009-2015, after which the Fed finally began deregulating capital markets by letting the interest rate on reserves rise.

Keep in mind that the Ukrainian war started after US inflation was already at 7.95% in February 2022.

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