One reader wrote:
I estimate (with a bit of disapproval) that a large part of today’s inflation is due to environmental policies, especially the war on fossil fuels.
Aside from the complete lack of documentation of the allegations, I noticed that oil prices started to rise before Biden was elected.They did rise after Biden was elected, although it should be noted that the 10-year to 3-month Treasury spread also started to rise, presumably no Because of the war on fossil fuels, but because expectations for economic growth have risen. We can see the co-evolution of oil prices (determined by global markets) and the 10-year to 3-month term spread in Figure 1.
figure 1: Oil price, WTI, USD/bbl (blue, left scale) and 10-year to 3-month Treasury spread, % (tan, right scale). Recession dates as defined by NBER are shaded in gray. Sky blue dotted line for elections, blue line for Georgia special elections, red dotted line for Russia’s expanded invasion of Ukraine. Oil prices are FRED series DCOILWTICO, spreads are calculated using FRED series DGS10 and DGS3MO. Source: EIA, Treasury via FRED, NBER and author’s calculations.
Oil prices actually start to rise as the recession ends, with a trough date of April 2020.
Readers might also argue that the volatility in oil prices since November 2020 is due to the ongoing war on fossil fuels; I tend to think that macroeconomic volatility, supply decisions by low marginal cost producers such as Saudi Arabia, and expectations will drive the time changes in oil prices.
The argument that the fossil fuel wars drive inflation necessarily means that headline inflation has risen in many countries as a result of the U.S. war on fossil fuels. Makes sense, but I must admit I don’t see the transport mechanism.
figure 2: Year-on-year CPI inflation in % for the US (black), Eurozone (HICP) (tan), UK (green), Canada (red), Australia (pink). The NBER defines the peak and trough dates of the recession for shades of gray in the United States. Source: BLS via FRED, European Commission via FRED, Canada via Statistics Canada, Australia via FRED/OECD MEI, NBER and author’s calculations.
More analysis from this particular reader, here. Since this reader does not believe in the usefulness of futures data, I have not included future data; oil price data is spot. This reader also accused me of hiding raw data and mislabeling data; therefore, I provided the FRED mnemonic for Figure 1. Links to CPI data are available upon request.
