first round and second round effects....(economics)



yak note...general layout needed....


there is a major problem in discussing 'inflation'...
this is the confusion of *external* price rises....eg a rise in the
world energy prices....

*price rises are not 'inflation'*
http://www.abelard.org/inflation.htm

but price rises will show up in *measures* claimed to reflect
inflation such as rpi or cpi indices....
thus such indices reflect both inflation *and* external price rises

higher external commodity prices such as energy prices in fact
have the potential to put downward pressures on living standards

this is a useful talk by bernanke (mid 2006) discussing this
problem....


"...economists have struggled to understand the ways that disturbances
to the supply and demand balance in energy markets influence economic
growth and inflation..."


https://www.federalreserve.gov/newsevents/speech/bernanke20060615a.htm




"Compounding these difficulties in markets for crude oil have been
constraints and disruptions in the refining sector of the energy
industry. In the wake of Hurricane Rita, one-quarter of domestic
refining capacity was offline, and here, too, the period of recovery
has been protracted. Even before last year's hurricanes, however, a
mismatch appeared to be emerging between the incremental supply of
crude oil, which tended to be heavy and sulfurous, and the demand by
refiners for light, sweet crude, which can be converted more easily
into clean-burning transportation fuels. These developments have
highlighted the need for additional investments in refining capacity
to bridge the gap between upstream supply and final demand."


includes useful summaries of oil and gas markets


"...Because the United States imports much of the oil that it
consumes, an increase in oil prices is, as many economists have noted,
broadly analogous to the imposition of a tax on U.S. residents, with
the revenue from the tax going to oil producers abroad..."
.....


####
"...The rise in prices paid by households for energy--for example for
gasoline, heating oil, and natural gas--represent, of course, an
increase in the cost of living and in price inflation. This direct
effect of higher energy prices on the cost of living is sometimes
called the first-round effect on inflation. In addition, higher energy
costs may have indirect effects on the inflation rate--if, for
example, firms pass on their increased costs of production in the form
of higher consumer prices for non-energy goods or services or if
workers respond to the increase in the cost of living by demanding
higher nominal wages. A jump in energy costs could also increase the
public's longer-term inflation expectations, a factor that would put
additional upward pressure on inflation. These indirect effects of
higher energy prices on the overall rate of inflation are called
second-round effects."
####
The overall inflation rate reflects both first-round and second-round
effects. Economists and policymakers also pay attention to the
so-called core inflation rate, which excludes the direct effects of
increases in the prices of energy (as well as of food). By stripping
out the first-round inflation effects, core inflation provides a
useful indicator of the second-round effects of increases in the price
of energy.

yak note....emphasis required....
....
"...The market for alternative fuels is growing rapidly and will help
to shift consumption away from petroleum-based fuels. Government can
contribute to these conservation efforts by working to create a
regulatory environment that encourages the growth in energy supplies
in a manner that is consistent with our nation's environmental and
other objectives. Given the extraordinary resilience of the U.S.
economy, I am confident our nation will be up to this challenge."


ie substitution could work to offset pressures on fossil fuels

......

ps...here is bernanke's presentation before the joint economic
committee of the us congress, november 8, 2007
mostly on the current credit crunch..
https://www.federalreserve.gov/newsevents/testimony/bernanke20071108a.htm

he's not the genius that greenspan is but he looks like
a good solid workman and doubtless experience will grow

regards...


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