Higher energy prices - overall effects not bad

Contrary to general expectations, the large and persistent rise in energy prices that has occurred over the past two and a half years has not caused substantial problems for the overall U.S. economy.

So begins a recent paper from the Congressional Budget Office (CBO) analyzing the short-term macroeconomic effects of rising energy prices. The paper draws comparisons to the more negative fallout of the energy crisis that occurred in the 1970s. The current effects on gross domestic product (GDP), employment and inflation have been "moderate." Why? In brief: strong consumer spending, business investment and exports; better management of monetary policy; and the economy's increased flexibility and stability. Factors that have contributed to the economy's flexibility include deregulation, advances in informtion technology, and innovations in financial markets and institutions.

Deregulation and the newer information technolgies have joined, in the United States and elsewhere, to advance flexibility in the financial sector. Financial stability may turn out to have been the most important contributor to the evident significant gains in economic stability over the past two decades. --Alan Greenspan, Sept 27, 2005.

The Economic Effects of Recent Increases in Energy Prices (pdf, 448 KB, 26p.), July 2006