Is inflation beaten?
Has the effect of oil prices on inflation been underestimated?
The BBC's Rodney Smith looks at the prospects for
inflation and asks whether it really has gone away.
Inflation's gone away. Hooray!
Well, not quite.
Western governments are cock-a-hoop with their
success at licking inflation. Deflation has become the
fear of the age.
Profound economic thinkers are hard at work on
solutions to defeat this new monster. Many are vocally
trying to persuade governments that it is time to relax
the tight economic reins that curbed regularly rising
prices.
But they may be wrong, seriously and alarmingly wrong.
The Opec factor
The cost of oil could soon
rise in a repeat of the early
1970s, when the
Organisation of Petroleum
Exporting Countries, Opec,
quadrupled prices and almost
destabilised the world's
economy. As people
discovered then, everything
runs on oil, or on something
which runs on oil.
Since then, the
oil-consuming West, in
particular, has grown familiar
with the ideas that:
Opec has become incapable of exerting the same
discipline again
There is plenty of non-Opec oil
This may be unjustified simple thinking, says energy
expert Dr David Fleming. He told Sue McGregor on the
Radio Four's Today programme that figures published by
the most respected energy research organisation, the
International Energy Agency, show that world oil supply
and demand are diverging, and heading for a deficit.
The gap will have to be filled by Opec producers, he
says, giving them their more power than they have for 20
years.
The IEA, whose figures Dr Fleming used, responded by
saying that this was too extreme a view, but that oil
prices might go to $25/bbl - double what they are now.
Connection 'underestimated'
But Dr Fleming's remarks come at an interesting time.
Coincidentally, at least one other stockbroker research
team has concentrated on a closely related subject.
BT Alex Brown warns investors against the popular belief
that low inflation is the result of the achievement of a
structural adjustment. On the contrary, say Ian Hartnett,
Bob Semple and company, current low inflation is the
result of low oil prices. And they go on to show that low
oil prices have always led periods of low inflation and
vice versa.
Not only that, they say, politicians have regularly
underestimated this connection, since the first oil shock.
They have not looked for evidence that oil prices will rise;
they have taken that for granted
news.bbc.co.uk
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