Take for instance this post by Raymond Learsy at HuffPo. He tries to take the Washington Post to task for their story that asserts that much of the run up in oil prices is due to political fears of future oil supplies, not current supply and demand.
But then, quite gratuitously, added: "Though oil prices set a record for the New York Mercantile Exchange, which started trading in 1983 they still didn't match the all time inflation-adjusted peak. A quarter-century ago, after the Iranian revolution and the outbreak of the Iran-Iraq war, the price of crude oil climbed to over $90 when expressed in today's dollars".
[...]
What the Post didn't tell us, were the same parameters applied to gold, which after all is meant to be a bellwether for inflation and political risk, we would be paying circa $1700 per ounce today. Gold was selling at over $800 per ounce at the time and inflation base of the Post's calculation. Gold closed today not, I repeat not, at $1700/ounce but rather at $670/ounce! So, thank you Washington Post. We are all going out immediately to our neighborhood jewelry stores and maxing out our credit cards on gold rings, bracelets, necklaces, and tiepins.
Truly, truly an over-simplified and faulty comparison, Mr. Learsy. Economists adjust for inflation so they can compare prices over time. Note that I said "compare prices over time." Just because inflation occurs over time, it does not mean that commodity prices hold constant with inflation. The real dollar value of gold only means a few things. First, gold is much cheaper now than it was then. Second, people are less worried about current inflationary pressures and are investing less in gold because of that. Third, and inversely to the second point, other investments like the stock market are providing better investments because current inflation is stable, removing demand from gold. Fourth, there is no fear that large portions of the gold supply will be taken off the market anytime soon-the fear which is driving oil prices up. What it does not mean is that gold and oil prices are both directly pegged to inflation.
Inflation is a factor that can influence commodity prices by influencing supply and demand levels, but commodity prices are not directly tied to inflation. Commodity prices are driven largely by current supply and demand and future supply and demand possibilities. That means that my one dollar can conceivably buy more of a commodity today than it did 25 years ago in real dollar terms. Pegging oil prices and gold prices directly to inflation shows an utter lack of understanding of economics.
When I first read Mr. Learsy's post, I treaded lightly because he certainly has some fine credentials and I was concerned that I might be wrong. After reading and re-reading Learsy's piece, I'm quite convinced that his analysis is completely off the mark and very lacking in the basic functions of economics.
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