>First, recall that until not very long ago the main scare, even at
>the Fed, was deflation. I think it would be fair to say that rising
>oil prices have solved that problem – certainly a plus for
>accumulators, absolute or differential.
>
>Second, your argument about "punitive" effect of higher oil prices
>on non-oil profit will be correct if oil prices go up while other
>prices do not. But what if higher oil prices spark a generalized
>inflation? Will financial intermediaries, automakers, etc. be left
>far behind? Note that in his recent speech, Greenspan signaled
>rising profit margins as the main cause for rising inflation this
>time around -- not bad for an economy running far below capacity
>with stationary wages (and in fact, hardly an exception; business
>sector inflation is tightly and positively correlated with profit
>margins). The FT today speaks of airlines raising prices to “cover”
>the cost of higher energy. Will others follow? It is hard to tell
>given the lingering disinflation mentality. But give oil prices
>enough room to rise, and you may well see this mentality changing.
Lots depends on how accommodative the Fed is in the face of higher oil prices. They're almost certain to tighten tomorrow, but after that...who knows?
That aside, inflation isn't necessarily good for profits. Capital was deeply sad during the 1970s; profitability sucked. If oil prices stay high enough long enough we could have a recession, which would not be good for profits.
Poor Rupert Murdoch, who said in the runup to the war: "The greatest thing to come out of this for the world economy, if you could put it that way, would be $20 a barrel for oil."
Doug