Contained inflation

Most news sources have prominently displayed the high inflation rate in August. But only CBC Unlocked gives as much attention to the cause as to the effect on its front page headline.* And its analysis is worth a look as well:

The surprising story behind high oil and gasoline prices is that they are not causing the prices of other goods to inflate.

Energy prices are driving up the costs of making many goods, such as plastics and paper, as well as the cost of shipping them. But that cost isn't being passed onto the consumer...

Statistics show companies have made their operations more efficient by reducing the amount of energy used. Companies are inventing new products for which they can charge higher prices because they can't boost prices on existing goods. If that doesn't work, they are shutting down production or moving it to countries with lower labour costs. Raising prices is a last resort for companies facing competition from abroad.

Unfortunately, only the first two of these strategies can really be seen as positive ones (and it seems particularly odd that anybody would move offshore when that would seem likely to increase shipping costs all the more). But to the extent that businesses are becoming more energy-efficient, there is reason to believe Steve Maich's argument that some good is coming out of the higher oil prices. And most of the potential harm to consumers from higher fuel prices doesn't seem to have materialized yet.

We'll see if that holds up as gas shocks get even worse. But for now, while there's reason to watch closely to make sure that price increases are legitimate, there's definitely no reason to panic. Let's hope the Bank of Canada keeps that in mind next time it decides whether or not to raise interest rates.

*In fairness, the National Post also notes the cause and effect on its business page headline. But the NP's front page doesn't appear to mention the inflation story at all.