Ken Fisher: Oil’s Inflation Impact Isn’t What You Think
Ken Fisher argues that rising oil prices alone do not cause inflation, as inflation is actually caused by central banks creating new money. He explains that oil has inelastic demand, meaning people continue using similar amounts even when prices rise, which simply reorients production rather than changing overall economic output.
Summary
Ken Fisher addresses common misconceptions about oil prices and inflation in the context of recent Iran war developments. He begins by acknowledging that many people naturally assume rising oil prices will cause inflation jumps, but argues this assumption is fundamentally flawed. Fisher's central thesis is that price increases in individual commodities, including oil, do not constitute inflation - rather, true inflation is caused by central banks creating new money supply. He uses an analogy comparing oil to bubble gum to illustrate the concept of demand elasticity. With highly substitutable goods like bubble gum, when prices rise steeply, consumers can easily find alternatives, demonstrating elastic demand where small price increases lead to large decreases in consumption. However, oil and fuel operate differently due to their essential nature and limited substitutes. When fuel prices rise significantly, consumption doesn't decrease proportionally because people still need to drive, heat homes, and maintain essential activities. This represents inelastic demand. Fisher concludes that this dynamic simply reorients the production of goods and services rather than changing the net level of economic output, meaning oil price spikes redistribute economic activity rather than create true inflation.
Key Insights
- Fisher argues that rising oil prices by themselves do not cause inflation, contrary to popular belief
- He claims that true inflation is caused by central banks creating new money, not individual commodity price increases
- Fisher explains that oil has inelastic demand, meaning consumption doesn't decrease proportionally when prices rise
- He contrasts oil with substitutable goods like bubble gum, which have elastic demand and easily replaceable alternatives
- Fisher contends that oil price increases simply reorient production of goods and services rather than changing the net level of economic output
Topics
Transcript
So with all that's been going on recently relative to the Iran war and oil, you've got a lot of people saying, and it's easy to understand why, that this will cause a jump in inflation. The price of oil going up by itself is not inflationary. The thing that causes inflation is central banks of the world creating new money. When the price of something goes up a lot, it tends to want to fall into a spectrum of how much do you really need that thing? You know that if the price of bubble gum goes up steeply for reasons unique to bubble gum, that it's easy to find lots of things you might replace bubble gum with.…
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