Friday, October 19, 2007

Oil prices hit $90 a barrel

Oil prices soared passed another record today, reaching $90 dollars per barrel. The rise on fuel prices seems remorseless. In all likelihood oil will reach $100 a barrel by the New Year.

Why are oil prices rising? Today, the newswires suggested that the sudden rise on prices was due to political uncertainties in the middle east. Turkey might invade Northern Iraq, while the US might bomb Iran.

However, such explanations ignore the deeper reasons for spiralling inflation throughout the world - excess money supply. It is an old fashioned explanation, but despite its tired comportment, it remains the best explaination for recent price developments.

For the last six or so years, the central banks of North America, Europe and Japan have kept interest rates low and allowed credit to grow at unsustainable rates. Most of this credit went into housing and personal consumption. This credit boom co-incided with the industrialization of low wage countries like India and China, who pumped out cheap goods to feed the voracious consumers in the OECD. For a time, this put downward pressure on measures of inflation. However, as China and India have grown more affluent, demand has picked up and soon Chinese and Indian consumers have started to demand more bread, milk and oil. Commodity prices started to rise and inflation started to pick up everywhere. Now food and fuel prices are rising throughout the world.

However, central banks in the OECD have assumed the problem of inflation away, though an act of extraordinary statistical dishonesty. While Oil prices reach all time highs, central banks are pointing to their measures of core inflation, which excludes oil and food. In other words, they fixed their numbers to deliberately hide the true extent of inflation.

Nevertheless, inflation is something that can't be hidden. Consumers see it every time they go to the filling staton or the supermarket. Inflation is a nasty corrosive disease. It distorts prices, generates uncertainty, robs savers, and improvishes those on fixed incomes such as pensioners and people on benefits. It is anti-poor, anti-investment and anti-growth.

Publishing core inflation measures might be sufficient to satisfy Wall Street and the City of London. However, these cheap statistical tricks will not be sufficient to avoid the horrible consequences of rapidly rising prices.