Democrats’ anger with OPEC+’s decision to cut production is partially fueled by a belief that rising oil prices are driving consumer price inflation. This perception is inaccurate, since oil inflation’s role is quite modest. Like all policymakers, Democrats should spend more time reading economics textbooks and less time on social media.
In September 2022, consumer price inflation in the US stood at 8.2 percent. The breakdown confirms the complex range of factors that have contributed to this uncomfortably high level of inflation.
First, the category with the biggest weight is shelter (32.4 percent), where prices were higher than their September 2021 level by 6.6 percent, close to the headline level of 8.2 percent. It would take some serious intellectual contortions to attribute rising housing costs to elevated oil prices.
The causes are more demographic and social, as the rate at which new households have been forming has gone up. Moreover, with house prices soaring, people who would traditionally have purchased a house are now being forced into renting, and supply has been unable to keep up.
A highly important category is food, which has a weight of 13.4 percent. Food inflation was 11.2 percent, with some of the leading sub-categories being cereals and bakery products (16.2 percent), and dairy and related products (15.9 percent). While fuel prices contribute to this class of inflation, general supply chain problems as well as ones specifically tied to the Ukraine conflict have played a more prominent role.
Another leading category is non-food/energy commodities, which have registered an inflation rate of 6.6 percent, while bearing a weight of 21.2 percent in the inflation basket. Consumer durables such as new vehicles (9.4 percent) and used cars and trucks (7.2 percent) are key drivers of this inflation, with the global microprocessor supply problems being a fundamental cause.
Energy collectively has a weight of 8.2 percent and has an inflation rate of 19.8 percent. And while gasoline prices – which strongly depend on global crude oil prices – have been rising at an annualized rate of 18.2 percent, this is only part of the problem. Electricity is becoming more expensive (15.5 percent) independently of global oil prices, and this is partially due to rising demand for natural gas and coal as countries struggle to find alternatives to Russian oil.
A key underlying driver of inflation in the US that is common to all these sectors is rising labor costs. With unemployment low and falling, and people reevaluating their minimum demands to be in the workforce, employers are having to raise their wages to attract workers, and they then pass these higher costs on to consumers in the form of higher prices.
Also lurking in the background is the specter of loose monetary policy. Electronically issuing trillions of dollars of currency during the last 15 years and pumping them into the banking system was always likely to unleash a wave of inflation. That has been the global economy’s experience in response to the hundreds of acts of monetary debasing the world has witnessed since commodity and fiat currency replaced barter.
Putting this complex picture together, it becomes evident that even a sharp rise in crude oil prices would have a modest effect on the spending power of American households. Inflation is being caused by many unrelated phenomena and singling out oil prices as the culprit is disingenuous and irresponsible. Changing a pillar of your foreign policy based on this rhetoric is extremely imprudent.
Looking at the latest Gallup poll on “the most important problem facing the country today” suggests that American voters are more savvy than elite politicians. In September 2022, 17 percent responded inflation, with only three percent singling out fuel/oil prices. Voters identified many other phenomena as being more pressing, including immigration (6 percent), race relations (5 percent), abortion (4 percent), and crime (4 percent).
The big concern for the White House and the Democrats is that “the government/poor leadership” received the highest share by some distance (22 percent). This figure was also the highest for any factor during the period April-September 2022, indicating that this problem is spiraling out of control.
Blaming others for your own shortcomings is a widespread cognitive bias that we all suffer from. However, it is highly disappointing for a politician of Joe Biden’s experience to be a walking exemplar for this undesirable trait.
Nobody is error free, and the true mark of a statesperson is acknowledging one’s mistakes and fixing them proactively rather than defiantly doubling down on the behavior that got you there in the first place. The US’ foreign policy must be based on a sound understanding of econ 101, rather than a partisan rejection of it.