inflation, hedge against inflation, merryn somerset webb, oil bears, bubble, oil

Inflation - it does exist

02.12.2005

by Merryn Somerset Webb

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Only last month, Fortune was telling us that the oil price was hitting the way Americans travelled. “Shoppers are making fewer trips to the mall. Bicycle sales are booming. Even car-pooling is back in vogue.” The upshot was that in the four weeks to 1 October, US gasoline consumption fell 3%.

Sadly, this admirable conservation of energy (and cash) didn’t last long. “Will you drive more as fuel costs decrease?” asks a survey on the Dallas Morning News website this week. The answer? A resounding ‘yes’.

According to the Energy Information Administration, US gasoline usage did briefly dip below last year’s, but by mid-November it was back to its usual levels – ie, higher than it was a year earlier. A price spike affected behaviour for a few weeks, then Americans reverted to their normal gas-guzzling habits regardless. No more trying car-pools and no more tiring cycle rides.

There are hordes of oil bears out there who think the recent fall in the oil price spells the end of its bull run, but I can’t see how they can be right. The Americans are clearly going to keep demanding vast amounts of oil and we know the Chinese and Indians are keen to catch up (the number of cars in China is doubling every few months).

Yet the world is currently only producing a few million barrels (at best) more than it uses up every day, so how can oil at $50-$60 a barrel be considered a bubble?

The nay-sayers are wrong - inflation does exist

The falling oil price has brought out more than just the oil bears to gloat; it’s also brought out the inflation nay-sayers, who suggest that, with oil out of the equation, we don’t have to worry about rising prices anymore and we therefore don’t have to worry about rising rates either.

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I can’t see how they can be right either. Inflation isn’t just about oil. It is also about other commodity prices and many of these, from copper to platinum, are still hitting highs on a regular basis – even silver is near its 18-year high.

Inflation is also about currencies and, as we know, the pound has been falling for months, raising the spectre of imported inflation. And finally, it is about wages, something we know Gordon Brown is worried about.

He tells us that any inflation we have seen in the US numbers is all about oil, but if that’s the case, why has he taken it upon himself to write to the pay-review bodies in the public sector and beg them to keep next year’s pay rises at 2%, rather than at the kind of levels public-sector rises normally run at these days (over 4%)?

I imagine it’s because he knows there is inflation in the system already and hopes he can stop it getting out of control. No wonder gold, everyone’s favourite hedge against inflation, breached the $500 level this week.

(And if you'd like to know more about gold, see the report below...)