THE IMPACT OF OIL PRICE HIKES ON INFLATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001900030151-8
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 8
• Document Creation Date: December 19, 2016
• Document Release Date: August 19, 2005
• Sequence Number: 151
• Publication Date: October 16, 1974
• Content Type: MF

STAT
Approved For Release 2005/12/14 :CIA-RDP85T00875R001900030151-8
 Approved For Release 2005/12/14: CIA-RDP85T00875R001900030151-8
CENTRAL INTELLIGENCE AGENCY
WA$HING,rON, D.C. 20505
16 October 1974
SUBJECT
Mr. Thomas D. Willett
Deputy Assistant Secretary
for Research
Department of the Treasury
The Impact of Oil Price
Hikes on Inflation
In response to your 7 October request, we are
forwarding the attached report on the impact of oil
price hikes on inflation. The calculations included
in the report are based on input-output tables for the
major industrial countries -- the United States, Japan,
United Kingdom, France and West Germany. If there are
any further information you require on this or related
matters we would be happy to oblige.
STAT
Attachment:
As stated
Distribution: (S-6548)
Orig & 1 - Addressee (Advance conv? hand- -nrr; r,a i i r -
Approved For Release 2005/12/14: CIA-RDP85T00875R001900030151-8
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 Approved For Release 2005/12/14: CIA-RDP85T00875R001900030151-8
1. Higher oil costs have considerably aggravated
inflationary pressures in major industrial countries. In
all instances, the increase in domestic prices has accel-
erated sharply since OPEC raised crude prices last October
and December. During the first half of 1974 wholesale
prices in major industrial countries increased at an annual
37% rate while consumer prices jumped 18% on average --
the sharpest rise in post-war history.
.2. Various estimates have been made of the impact
oh higher oil prices on the inflationary rate. The OECD
Secretariat estimates that higher oil costs have added
2%-3% to overall price levels. Essentially that figure
represents the increase in oil import costs as a share of
OECD gross national product. This approach dilutes the
impact of oil by including the government and private service
sectors which account for about half of OECD GNP. Moreover,
no allowance is made for the indirect impact.
3. For purposes of measuring the impact on goods in
domestic and international trade, the effect on the whole-
sale price indc>. is more valid comparison. To quantify
the impact on wholesale prices involves use of input-output
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tables. The technique essentially involves increasing
the -,rude oil row in the inverted input-output tables by
the percentage rise in oil prices. This, in turn, gives
both the direct and indirect impact of the oil price rise
on each sector of the economy. To evaluate the overall
impact on the economy the resulting price changes for each
sector -- steel, for example -- are then aggregated using
wholesale price weights. The results correspond to the
familiar wholesale price index.
The Overall Impact
4. Applying the technique to input-output tables for
the major industrial countries yields the following results
for the period October 1973 through June 1974.
Percent
Increase in
Delivered Price
of Crude Oill
increase in
Wholesale
Prices
France
251
3
8
Japan
248
.
8.9
United
Kingdom
173
5.6
United
States
96
5
West Germany 170
.1
7.7
lIn terms of national currency. Data for France, Japan,
the United Kingdom and the United States are to June 1974,
and for West Germany to May.
5. The lion's share of the oil price increase has
come since December when OPEC prices were roughly doubled.
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That price hike was the chief factor stimulating wholesale
price inflation during the first half of 1974. The input-
output analysis indicates the following:
? Roughly half the wholesale price rise in Japan during
the first half of 1974 was due to higher oil prices.
? About 40% of West Germany's price rise was due to
higher oil. prices.
? In the United States approximately half of the whole-
sale price rise reflected increased oil costs.
? In the United Kingdom about one-fourth of the rise was
attributed to oil while in France the share was only
about 20%.
The calculated impact in France is lower than in the other
countries essentially because oil-related products have a
smaller weight in the French wholesale price index. The
results are similar to those of a recent French government
study on the impact of higher oil prices. That study also
indicates higher oil prices accounted for about one-third
of the nearly 17% annual rate of increase in French consumer
prices during the first half of 1974.
6. The latest OPEC price hike announced in October
will further spur inflation. If the price rise is carried
through, it will add nearly 5% to crude oil costs for the
major countries. Input-output analysis indicates that such
an increase would boost wholesale prices in the major countries
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about 0.5%. On the surface, this figure appears small
compared to recent and present rates of inflation. It
represents, however, approximately one-half of Japan's
long-term average annual rate of increase in the WPI and
about one-fourth that of the US and most West European
countries.
Impact on Industry
7. In all cases the direct and indirect impact on
industrial production costs has been substantial. In-
dustries hardest hit by the oil price hikes include
chemicals, rubber, electric power, and textiles. In the
case of Japan, for example, unit output costs in heavy
chemicals increased 9% as a result of oil price hikes
since October 1973. Gas and electric costs have been
increased roughly 20%. Air and transport costs have also
increased sharply -- rising 151-20% in the case of France.
8. The impact varies from industry to industry depending
on reliance on oil and oil-related inputs. In many instances,
higher oil prices have directly and indirectly accounted for
a major portion of the wholesale price increase for key
manufactured products. Based on Japan's input-output tables,
for example, roughly 30% of the rise in steel wholesale prices
and approximately one-third of the rise in chemical prices
since October 1973 result from higher oil costs. Data for
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West Germany show that roughly 35% of the increase in
machinery prices reflect higher oil costs.
9. The following table. show the impact of higher oil
costs on major industries in selected industrial countries.
CHANGE IN UNIT OUTPUT PRICES
UNITED
KINGDOM
AG
I
JAPAN
GERMANY
R
CULTURE, FORESTRY 4.3
RAW
2.8
4.6
MATERIALS 4.5
REFI
7.3
5.7
NED PETROLEUM 104.8
PROC
94.8
67.2
ESSED FOODS 3.0
TAB
3.1
4.3
ACCO 2.2
IRON
1.4
1.0
AND STEEL 5.3
NON-F
4.9
6.1
ERROUS METALS 3.0
FAB
5.2
3.9
RICATED METAL FABRICATIONS 2.9
3.3
3
3
CHEMICALS
RUBBER
7.4
3.3
8.5
4.5
.
4.8
3
4
FIBERS, YAR~NN,
FABRICS
2.6
4.1
.
2
4
CLOTHING, FURS
1.7
3.0
.
1
5
LEATHER GOODS
2.3
3.2
.
2
5
WOOD PRODUCTS
'
"
2.2
4.2
.
3
4
AGRICUL
I
URAL
& INDUSTRIAL
2
0
2
.
MACHINERY
ELECTRICAL ' ACHINERY
.
2
0
.8
2
3.2
.
.9
2.6
TRANSPORT MACHINERY
2.6
2.6
4
7
PRECISION INSTRUMENTS
1.7
2.5
.
2
3
MISC. !MANUFACTURES
3.6
4.9
.
1
9
CONSTRUCTION
2.1
3.8
.
2
5
UTILITIES
13.9
17.2
.
6
0
TRANSPORT
3.4
6.2
.
10.0
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Some Unmeasured Effects
10. The input-output analysis neglects some indirect
effects of higher oil prices on rates of inflation. For
example, by contributing to overall inflation rates, higher
oil prices have added impetus to wage demands in major
industrial countries. A prime example is the case of Japan
where perhaps one-fourth of the rise in wage rates this
year may be attributed to the aided inflation caused by
higher oil costs. Based on past relationships between
price changes and wage increases, this year's wage hike
would have averaged around 25? in the absence of the oil
price rise. Actually, hourly wagr-s have increased 32% on
average.
CIA/Orxt
16 Octcbcr 1974
Approved For Release 2005/12/14: CIA-RDP85T00875R001900030151-8