Energy Prices, Inflation, and Personal Savings

Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery. — Charles Dickens.

As readers may have noticed, I’ve held the view that the post-peak era is likely to be more inflation-prone than the pre-peak era. The reason for this is the strong correlation between inflation rates in the past and oil shocks. I even had a mechanism in mind: that in an oil shock, there is less aggregate supply of goods and services, since just about any good or service requires energy to make and deliver, and so if there’s unexpectedly less energy, there’s going to be less goods and services. I further assumed that people would respond to this by borrowing and/or liquidating assets in an attempt to maintain their lifestyle. This “bidding war” for the unexpectedly reduced goods and services would in effect raise the velocity of money and cause a rise in the price level.

It occurred to me that the personal savings rate is a way to test my mental model of what’s going on, so I investigated further. The idea is that if my model is correct that during a resource-constraint people are borrowing and/or liquidating assets in order to bid for the remaining goods and services, that ought to show up as a drop in the personal savings rate. To summarize the punchline, I discovered that there’s some evidence that things are working according to my model at present, but no evidence that things worked that way in past oil shocks. So I am suitably mystified.

The Oil Drum