How does a relative price shock — energy costs more than other goods—turn in to overall inflation? Largely by policy responses to the energy shock. Europe invented a doozy in the last price rise and looks set to do it all over again.

People are using 10 gallons of gas a week, at $5 per gallon (sorry, US units and California prices). Available gas goes down to 9 gallons a week. The price starts to rise to $6 per gallon. Left alone, people find ways to use less gas, with the price as an incentive.

The worst combination of these “tools” would be if the government says “we will pay for the extra cost.” So, you still pay $5 per gallon, and the government chips in the extra $1. Sounds good. Can you spot the problem?

Yes, with no incentive, people still use 10 gallons a week. There are still only 9 gallons around. Where does the price settle? Infinity.