Comments: The oil bubble will burst and interest rates fall

So the answer to everything is to cut Interest Rates ? Doesn't matter whether the oil price is up or down.

When Interest Rates are at already very low levels, this strategy has a law of diminishing returns.

Cutting rates further will be like putting your foot down on the accelerator without their hardly being any fuel left in the engine.

I find it amusing why there is still so much pressure on the BoE to keep reducing rates - if we can't get the economy moving on 4.5% then you have to look at other reasons why we're slowing down.

The "fuel" I was referring to is money, of which the British consumer has hardly any left of because their crippling mortgages, housing costs and other costs (which are conveniently ignored in CPI).

It looks to me like the "inflation" figure has been fiddled for years.

Plus there's the small matter of £1.1Trillion of a debt and housing bubble out there - an oil bubble as you suggest is small fry in comparison.

Posted by Warwickshire Lad at August 14, 2005 09:41 AM

We just had a very fascinating discussion of whether Oil is or isn't a Bubble (see link: http://bigpicture.typepad.com/comments/2005/08/is_oil_a_bubble.html). A 90 year chart of inflation adjusted gas prices, at the link, suggest it is.

The past behavior of prices also implies that the reversion to prior mean (i.e., price collapse), when it happens, will occur over a long time period -- 5 to 8 years -- as opposed to a faster, Nasdaq-like collapse.

Posted by Barry Ritholtz at August 14, 2005 02:48 PM

Looking at the June CPI release from the ONS, there’s a graph on page 4 of ‘12-month percentage changes’ in the components of the CPI:
http://www.statistics.gov.uk/pdfdir/cpi0705.pdf

Eight components made a positive contribution to inflation over the past year (all increasing above 2% individually) and four made a negative contribution.

The positive ones are mostly service related and are probably affected by higher oil prices.

The big negative contribution came from ‘clothing and footwear’ at –4.8% for the year. This negative inflation probably came from China and the weak US dollar.

But just as the price of oil can stop rising, the price of clothing and footwear can stop falling. China has started to revalue, the US dollar is rising along with rising US interest rates and the pound looks weak because, apparently, the UK economy is so sickly we need a rate cut.

Therefore, the brake on inflation coming from falling clothing (furniture and leisure goods) prices could be lifted very quickly. That just leaves those service companies passing on their costs.

If the oil price doesn’t drop soon the MPC could be facing 3% inflation faster than it thinks.

Posted by David Sandiford at August 15, 2005 05:04 AM

Historically speaking, it looks like we could still have a way to go:

http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/publications/energy_reviews_2005/STAGING/local_assets/downloads/pdf/oil_section_2005.pdf

Yikes. I sincerely hope not.

Posted by Rory Winston at August 15, 2005 04:48 PM

”If the oil price doesn’t drop soon the MPC could be facing 3% inflation faster than it thinks.”

CPI for July came in at 2.3% today, up from 2.0% in June. RPIX was 2.4%, up from 2.2%. Ha!

Well, no. The RPIX index didn’t rise at all from June. The average basket of goods and services cost the same in July 2005 as June 2005. It was only because the index fell in July 2004, but not in July 2005, that the annual inflation rate rose.

What’s going on? July is the ‘summer sales’ month. On average, RPIX prices usually fall at an annual rate of -4% in July; and then rise again at an annual rate of 4% in August. If that happens every year then there’s no change in the annual inflation rate in July, August or both months combined.

It didn’t happen that way in July 2005 – prices didn’t fall. Retailers didn’t reduce their prices in the summer sales the way they did in July 2004. Why?

My optimistic guess is that retailers had such a good June they didn’t need to shift unsold stock in a summer sale. My pessimistic guess is they reduced some prices but had to increase others to cover higher costs (because of oil or higher import prices).

We’ll have a better idea when we see the August figures. If the annual rate doesn’t fall back in August the MPC has an inflation problem on its hands.

Posted by David Sandiford at August 16, 2005 11:42 AM

"The BoE voted five against four for a quarter point cut earlier in August and Governor Mervyn King was against the decision, the minutes showed."

We're lucky to have Merv.

Posted by David Sandiford at August 17, 2005 10:06 AM
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