Pressure Back On Prices

02/03/2012 at 3:25 pm

Another year, another headline about record petrol prices in Britain. A combination of higher oil prices and a weaker dollar exchange rate is conspiring to cause the usual misery at the pumps.

Indeed, the price of oil as measured by the near Brent crude future had risen by 17.5% into yesterday’s close since the beginning of the year. This has been a tough act to follow. The MSCI World Index of developed-economy equity markets has put on only 10.3% in price terms over the same period; most major government bond markets have sold off, and corporate bonds of varying stripes have turned in performances lying somewhere in between.

Part of oil’s shine can be attributed to fear. Iranian sanctions and the possible threat of supply disruption through war have loomed large in the market’s mind. At the same time, however, Libya has begun to produce again. Production had almost halted as the Gaddafi regime finally collapsed over the summer, but by last month, OPEC estimates put Libyan crude supply at over 1.1m barrels per day. As well as fear, therefore, it seems that greed has had its part to play as financial markets have become somewhat less averse to risk in recent weeks.

We have already seen that such behaviour is not without foundation. Economic data from the US in particular has been strong, and European policymakers are once again enjoying that most valuable of commodities, the benefit of the doubt. Now the data has not been unequivocally positive and as ever we should be careful not to get ahead of reality. But it is worth remembering that a rise of some 25% would be required for the S&P GSCI index of spot commodity prices to recover its 2008 peak.

Weaker commodities, until recently, furnished the eurozone crisis with a valuable silver lining. Even in the UK, price inflation has fallen back to an unpleasantly elevated level (from the economically damaging rates seen during the recent period of explicit and de facto rises in indirect taxation). But much more of the kind of performance we have seen from commodities this year and inflationary pressure from rising energy and input costs will be back with us.

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