The Bureau of Labor Statistics released inflation data last week and this week. Last week, the core producer price index (PPI) showed tame inflation, despite higher energy costs. These costs are not being passed to consumer prices. Historically, they never really have been. Energy is just one part of a manufacturer’s costs, labor being the largest cost category. Increased productivity has paid for increases in energy and labor, but there is little to go around for anything else. Both businesses and consumers will adjust their costs accordingly, cutting back on discretionary costs.

This is not always the view, of course, and news this week was not particularly good for the energy outlook. Rumblings from Iran about cutting off oil shipments as part of the political tensions over their nuclear activities sent oil prices up to around $65. So it's important to keep these numbers in mind: 90, 140, 3.25, 5.80. Ninety dollars is the inflation-adjusted oil price from the late 1970s, $140 is that price adjusted for energy efficiency. We obviously have not reached those levels yet, and they would certainly cause a similar amount of serious economic stress as was felt at that time. The other prices are the prices for unleaded gas from that era in 2006 terms. Will we reach those heights? Probably not. Should we plan as though we will? Of course.

It's also important to note that price changes in commodities are the result of supply and demand. One of the reasons oil goes up is because there is growing demand for it. That is not inflation. Inflation is a general rise in the price of all goods. That is, there are too few goods chasing too much money, such as was the case in the mid-1970s here in the U.S. (Nixon strong-armed Fed chair Arthur Burns into keeping rates low; combined with tax policies that discouraged investment, it was deadly). Lower tax rates work because they create the incentive to produce more goods, and those goods absorb the excess money. This was the case in the Coolidge, Kennedy, and Reagan administrations, and in the Clinton administration for its change in capital gain rates in its second term (though personal tax rates were not lowered, which would have helped at that time because the surpluses had started to suppress the economy—but that's a discussion for another time).