Past oil shocks simply caught the US economy at inopportune times when inflation already was troublesome..
|Oil shocks Compared|
In this episode that is not so. The oil price shock came with inflation at about 2.4% driving it up to 4.1% currently The post shock rate (that comes five or so years after the shock - a 'shock that has been more gradual in some ways) is still lower than it was BEFORE the previous shocks hit in earlier times. The same is true of core inflation.
Not only are the current inflation rates low compared to past pre-shock rates, but the amount by which prices have risen is much less. In the case of headline inflation in particular there may still more inflation in the pipeline so it's too early to count our 'chickens' as the saying goes. But there is NOTHING at all in these figures that is scary. The Fed is doing an excellent job - even worrying too much.
What is different is that in the aftermath of the second oil shock special factors brought oil demand and prices to heel. The second shock added to the previous one so there was more conservation in progress already. The high inflation meant that the Fed was tightening and a deep recession helped to cut oil demand and drop oil prices. Since prices had gone up sharply in 1973 there was also time for a supply response. Alaska oil (for one example) came on line.
As a result oil prices were routed.
In 2008 India's and China's rapid economic development will keep the pressure on as their demands continue to grow even if the US and world economies slow. Still, oil prices have been rising for some time. There is conservation afoot. There will be some supply responses. Alternative fuels at least are being explored. I think that the India and China cards are being being overplayed. History suggests that we can cope with these sorts of things much better than people fear. I would not discount either the conservation or supply responses to this shock especially given the height that prices have achieved. The prospects for a global recession to cool things off is not exactly remote even if it is not apt to be caused by spiking interest rates. High oil prices spread that same depressing effect. Beware.