Oil and inflation

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The price of oil has nearly doubled from its lows in the first quarter. Now analysts are asking if inflation can be far behind. Crude is such a pervasive commodity that is has the power to affect both the costs of business and consumer spending. But oil prices may do nothing to touch off inflation at all.

According toReuters, "Against an increasing global oil and agricultural commodity price backdrop, we see a reasonable chance that market headline inflation concerns maintain in the coming weeks," Barclays Capital wrote.

But inflation is based on the ability of businesses and consumers to actually spend more money, which is not a likely outcome from crude price inflation. With business revenue flat to down in many industries, and consumer incomes actually shrinking, the price of crude may only cause another recession dip and inflation may not be a factor at all.

As oil prices rise, they may just pinch earnings of the users of petrochemicals, oil, and gas. This would compromise any economic recovery by taking away from the ability of businesses to hire and make capital expenditures. It may push the consumer to the point where he has to pull in on the tiny amount of spending he is doing on goods and services. Fuel price increases may even undermine his ability to pay a mortgage or keep up with credit card debt.

Rising oil prices are not going to cause inflation. But they may kill whatever recovery is underway.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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