What are we to make of the UK’s ultra-low inflation rate? I think it should be viewed as good news – at least, on balance. We should remember that while low inflation feels nice, the main reason it’s happening isn’t necessarily beneficial to the UK economy as a whole. The recent collapse in oil prices puts a bit more money in our pockets, but it’s jeopardising our North Sea operations, one of the UK’s most important industries.
Above all, our reaction to low inflation, mustn’t dissolve into some kind of “deflation panic”. The zombie bankers, share-boosters and government debt junkies would then use it as an excuse for another round of mega-money-printing by the Bank of England, euphemistically known as quantitative easing. That would be seriously counter-productive – and must be avoided.
Attempting to forecast the oil price is a mug’s game. But that hasn’t stopped me in the past (ahem!) The reality is that crude is so important to modern life, and the path of the global economy, that for all the pitfalls of prediction, any serious economist needs to have a view on the future cost of the black stuff. Pivotal not just in terms of energy and transport, but also the manufacture of vital inputs from polymers to fertilizers, the dollar oil price is perhaps the world’s single most important economic variable.
My view is that the current price dip is temporary, partly illusory and that oil is now heavily over-sold, having fallen way below its fundamental value. As such, I’d venture that, in the absence of a 2008-style systemic meltdown on global markets, $100-a-barrel oil will return by the middle of 2015.
I’ve been reading “A Line in the Sand”, a riveting book by James Barr. It’s about the incredible manner in which the British and the French re-made the map of the Middle East during and after the First World War. Barr tells a sordid tale of hubris and eye-popping political skullduggery, as two colonial powers cooked up the Sykes-Picot Agreement of 1916, dividing Le Moyen Orient along a line drawn from the Mediterranean to the Persian frontier.
This book is vital reading, not only for the author’s gripping portrayal of high politics, intrigue and espionage, involving the likes of Lawrence of Arabia, Churchill and De Gaulle. The story also has deep contemporary relevance. For the Middle East’s colonial boundaries now look under severe threat, as the region is convulsed by a renewed outbreak of intra-Islamic conflict.
We’re told the Federal Reserve has “ended easy money”. I’m not sure that’s true. Yes, the US Central Bank announced last Wednesday that its gargantuan money-printing habit is soon to be scaled back. Instead of creating $85bn per month ex nihilo, the Fed will from January conjure up just $75bn. That’s still a massive base money expansion of $900bn a year.
At the same time, in a move apparently meant to help cash-strapped US mortgage-payers, but actually aimed at global financial markets, Ben Bernanke bolstered his “forward guidance”. America’s benchmark interest rate is likely to stay near zero “well past the time when the jobless rate declines below 6.5pc”, the Fed Chairman told the world. So US monetary policy remains ultra-loose but is now slightly less ultra-loose than before. Maybe.