September 6, 2023

The price of oil has "unexpectedly" gone up. Bad news for those who like when CPI graphs have a negative slope.

Energy is a major component of the price index central banks use to monitor inflation. Of course, the central banks adjusting benchmark interest rates does not affect the price of oil. Just like it doesn't affect the price of other major components of the consumer price index.

For those who follow:

• Brent: $89.64 a barrel
• WTI: 86.35
• Future contracts are set at about the $90 level, meaning that this price is not expected to come down.

The main reason for this: Russia and Saudi Arabia (all of the OPEC+, really) have slowed production and are diverting more oil to China.

It almost goes without saying, but oil prices affect the costs of pretty much everything. Our entire economy is based on producing things by burning oil and then using oil to transport those things around the world.

Including food.

The economic activity required to transition away from oil is going to happen at the same time as we use oil to keep the economy going.

The tension between spending on oil and spending on energy not created by oil creates a problem for capitalist economies.

As the price of oil goes up, it will register as positive gains for major economies even as they are (almost equally) limited in spending on alternative energies.

Threading the needle.

Or, playing Operation.

Whatever metaphor you want, the reality is that to find the path to a just and sustainable transition is lined with many failure points. The failure points can be spending too much on keeping our critical infrastructure from collapsing and not enough on alternatives—resulting in no transition (where we are at right now). On the other side, it is spending too much on the wrong alternative paths and having infrastructure that does not meet our needs.

Planning how we transition from fossil fuels is going to be dependent on finding the most efficient route. Something that the "free" market cannot do.

The point?

Many prices are currently affected by input costs out of our direct control. This is not "inflation" in the classic sense, it is price increases caused by real changes in costs.

Food is affected by oil prices, natural input costs, climate change's crazy weather, war, fertilizer production (read ammonia), and transport networks.

Directed investment is needed to shore-up this part of the economy. But, also a level of international cooperation that avoids own-goals like war.

Food alone has a complex input process that we need to look at changing. And, it might be one area that makes the transition to renewable clear for people.

Outlining these complexities might show that relying on our quasi-independent central banks to solve price and investment problems is not understanding the point of history we are in.

In the end, we need our governments to spend in ways that simply overshadow the impacts of central bank rate setting. This takes spending on not just one thing, but many things all at once in a coordinated and planned way.

• Growth in unit labour costs accelerates again

Unit labour costs—that is, the costs of labour per unit of output—of Canadian businesses continued to accelerate, reaching 2.1% in the second quarter. This was the highest quarterly growth rate since the first quarter of 2022 (+2.9%).

This accelerated pace of growth in unit labour costs reflected the acceleration in hourly compensation growth (+1.5%), resulting from the slowdown in hours worked.

Lower productivity. Higher wages per unit. Fewer hours worked.

It is almost like it is a regular summer. But, there is more going on:

Productivity was going to decline after the insane uptick during the second half of the pandemic.

People being pushed back to the office contributes to this, but so does the "normal" operations of society. People like to not be working and have started doing that.

Is it something we should be concerned about? It is rather unclear so far if it is a crisis of falling productivity. But, either way, there is only one way out for capital: invest in new production.

Which is why interest rates will be pointed to as a partial cause of the productivity slow-down. This might have a contributing factor, but it usually takes more than a year before real impacts from borrowing costs affect investment can be measured.

Are workers concerned by productivity metrics? Yes, if the changes comes at the expense of our bodies and minds. Keep an eye out. Investments in productivity gains can mean automation and job losses to other (cheaper labour) parts of the world.