In the 1970s OPEC, the oil cartel, increased prices which – it is often proclaimed – is responsible for the stagflation in Western countries. Whilst we would naturally expect such an increase in price of a vital commodity to lead to inflation (we will examine these effects shortly), is it possible that there could have been some deflationary effects too?

Naturally basic economic theory would tell us that the oil price increase would be inflationary:

Oil is a commodity which is highly price inelastic (meaning a change in prices isn’t met with much of a change in demand) and so a rise in its price will have to be absorbed by consumers. [...]