Hi All,
I was hoping that folks could clarify something for me. I was having a discussion with someone today who said that he thinks fuel prices drive price inflation. As I understand it, they don't, because as the price of fuel rises, people have less income available to spend on other goods and services. The reduced demand for these goods and services should drive prices down, rather than causing them to increase.
This all sounds sensible, especially if you are considering individuals purchasing fuel for their own vehicles, but what about the increase in the cost of shipping that accompanies the increased cost of fuel? Won't this drive retail prices higher?
It seems like the conventional wisdom holds that increases in fuel prices will cause an increase in all prices over time, since the cost of fuel is integrated into the shipping of goods and services. It seems reasonable to expect an increase in the cost of shipping products to result in an increase in retail prices.
If a pair of tennis shoes retail for $100 on a 50 margin and the cost of shipping each shoe goes from $5 to $7 the increase in shipping costs would drive down profit margin for the retailer, wouldn't we expect the retail price to move upward over time to compensate? Especially since the increased cost of shipping would effect many retailers in a similar way?
Any thoughts on this?
From the Non-Austrian Economist Milton Freidman: "Inflation is always and everywhere a monetary phenomenon."