Something will cause inflation to go up this year, but it’s not oil

Since the U.S.-Israeli war was mounted against Iran, oil prices have surged. As a result, pundits, journalists, and many economists have dusted off an often-used song sheet. It claims that higher oil prices will fuel inflation. While this narrative is widely accepted, it is wrong.

A surge in oil prices results in a change in relative prices, with the price of oil going up relative to the price of other goods and services. But the higher relative price of oil does not cause the overall inflation rate to pick up. That can only occur if the money supply picks up. After all, inflation is always and everywhere a monetary phenomenon.

It is often said that the inflation of the 1970s and 1980s in the United States and elsewhere was caused by the two oil crises of 1973-74 and 1979-80. The first crisis was a result of the Yom Kippur War, during which Arab oil-producing nations reduced oil shipments to countries that supported Israel. The second crisis stemmed from the revolution in Iran and its subsequent conflict with Iraq, which disrupted Iranian oil exporters. Both led to significant increases in oil prices. The standard narrative asserts that the correlation between the oil price surges and observed increases in inflation was causally linked. Even though widely accepted, and often repeated, this narrative doesn’t hold water.

While it’s true that each oil crisis was accompanied by inflation in some countries, that doesn’t mean that a surge in oil pri...