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Friday, March 04, 2011 1:58 PM

Record Gasoline Prices in Europe, Over $8 in UK, Italy, Germany; California Faces $4; Reflections on "Inflation"

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Bloomberg reports Record Gasoline Grips Europe, California Faces $4 a Gallon.

Gasoline prices are setting records across Europe and exceeding $4 a gallon in California as the rise in crude oil caused by the conflict in Libya punishes companies and consumers.

Households are cutting back on travel, cinema visits and groceries in the U.K., where prices jumped to 130.68 pence a liter ($8.06 a gallon) yesterday, according to research from the Automobile Association, Britain’s largest motoring organization. Prices set records in the Netherlands and Italy today. The current average U.S. gasoline price is near a two-year high at $3.81 a gallon, according to the AAA website.

The impact on consumer prices may push European Central Bank President Jean-Claude Trichet to raise interest rates as soon as next month to discourage higher wages and head off the threat of an inflationary spiral.

“Rising fuel costs are negative because they push inflation up and slow the economy down,” said Philip Shaw, chief economist at Investec Securities in London. “It is essentially energy costs that have resulted in ECB putting its finger on the interest rate trigger.”

In Italy, gasoline prices reached 1.544 euros a liter and diesel climbed to 1.438 euros a liter ($8.17 a gallon), according to a chart published by web energy daily Quotidiano Energia. Gasoline prices in the Netherlands reached a record 1.697 euro a liter from 1.692 euro in June 2008, according to Paul van Selms, head of UnitedConsumers, a lobby group for consumers in the Netherlands.

The average price for super-grade gasoline in Germany, Europe’s largest economy, was 1.55 euros per liter today, close to the 1.58 euro record from 2008.
Reflections on Inflation

I do not know if Trichet hikes short-term interest rates soon or not. It is conceivable it is the correct move.

However, the idea that something needs to be done in the face of a supply shock on top of overheating in China and peak oil constraints is ridiculous. Supply shocks are anything BUT inflationary.

If Europe or the US was on a rampage with credit expanding wildly it would be a different matter. However, credit expansion is not happening in the US or Europe.

Dumb things happen (in both directions) when central-planning jackasses view inflation in terms of prices rather than money supply and credit, then take (or fail to take) action because of prices.

For example, Greenspan ignited an enormous housing bubble by failure to consider reckless credit expansion. Instead, Greenspan foolishly focused on the CPI which suggested low inflation.

Such policies have central bankers forever-chasing their tails.

Where Should Rates Be?

Nothing above implies agreement with central bank rates set near zero.

The free market, not a bunch of bureaucrats, should set interest rates. None of the central bankers saw this crisis coming, so how the hell do they think they know what interest rates should be?

I don't know where they should be and they sure don't know either. At least one of us is smart enough to admit it.

For more on this line of thinking, please see Goldman's Blood-Sucking Leeches Model, Money Multipliers, Macroeconomic Dark Ages, the Taylor Rule, and Nonsense from Trichet.

Mike "Mish" Shedlock
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