Oil Price Increases Could Presage Stagflation in US
Desmond Lachman | Financial Times
July 19, 2006
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By overlooking the very changed economic context in which the present run-up in international oil prices is occurring, your editorial "Spooking the market" (July 15) was too sanguine about the potential adverse impact of further oil price increases on the US economy.

Resident Fellow Desmond Lachman
Over the past two years, the US economy was characterised by a highly accommodative monetary policy and by ample excess capacity. As such, low interest rates masked the adverse effect of oil price increases on US economic activity. At the same time, excess capacity shielded the US economy from the inflationary impact of oil price increases.

With US interest rates now at more normal levels and with the US economy now operating at very close to capacity, one should expect international oil price increases to affect the economy in the more traditional manner of earlier oil price spikes.

For that reason, one would not want to underestimate the potential for further oil price increases to produce stagflation that could pose a real challenge for the Federal Reserve.

Desmond Lachman is a resident fellow at AEI.

About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
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