Inflation strikes back - but it's not straightforward

INFLATION is back. Low oil prices dragged down headline inflation rates in recent years, creating a low inflation illusion. Crude oil is not directly part of consumer spending - pouring a barrel of crude oil into the engine of your car will have negative consequences. However, consumers indirectly buy crude oil as petrol, airline tickets (aviation fuel) and food (diesel-powered delivery trucks). The prices of petrol, airline tickets and food are in consumer price inflation. Crude oil is embedded in these prices.

Crude oil generates about 5 per cent of a developed economy's consumer price basket. In recent years, the price of crude oil fell about 75 per cent from peak to trough - obviously impacting headline inflation.

Domestic labour costs generate about 70 per cent of a developed economy's consumer price basket. This is obvious for service prices; legal fees are nearly all labour costs. However, domestic labour costs also affect imported goods prices. Import prices are increased by the costs of a shop assistant, advertising executive or truck driver - domestic labour costs.