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Will rising oil prices trigger yet another round of easy monetary policy?
Although the latest surge in oil prices will put upward pressure on near-term inflationary trends, central bankers across the developed world will be more worried about the nascent recovery running into the sand.
But doing more quantitative easing in the face of rising inflation will be a hard sell. Just look at the Bank of England’s difficulties.
Over the past five years, inflation has exceeded the BOE’s 2% remit by, on average, more than a full percentage point. Although the BOE has consistently argued that the overshoot came from forces beyond its control–a 25% devaluation, globally-surging commodity prices and two 2.5 percentage point rises in the government’s value added tax–it hasn’t helped its cause by consistently underestimating inflation by a large degree.
There is a growing suspicion that the BOE errors are systematic and down to a desire to inflate away the U.K.’s huge private and public-sector debt loads. If oil prices, which are now back to record highs in sterling terms, cause inflation to overshoot yet again following another two rounds of quantitative easing, the BOE will start to suffer real credibility problems.
The problem with a loss of credibility is that once growth starts to return to more normal levels, people won’t believe central banks will be willing to keep control of inflation. The huge amounts of liquidity already in the global financial system will then provide dangerous kindling for a huge inflationary surge.
The Federal Reserve is already coming under considerable political pressure about a perceived indifference to inflation. It too has forecast falling inflationary pressures over the coming couple of years, justifying forecasts that it will keep policy super accommodative through 2014.
Meanwhile, the European Central Bank is launching the second part of its liquidity program this week. Although it has given euro-zone banking a lifeline, it runs the risk that much of this money makes its way to just about the only credit-worthy economy in the single-currency area, Germany. With German unemployment at 20-year lows and wage negotiations picking up, the last thing the country needs is a credit boom. Throw in surging oil prices and Germany could well face an inflationary cycle.
Somewhere in the collective central-banking brain, there must be a thought that oil prices aren’t just responding to growth in demand from emerging markets or to political instability in the Middle East, but also to the combined monetary policy of developed-market central banks.
There must be some concern that the monetary-easing seen so far will have a ratchet-like effect on inflation worldwide. And yet if they don’t do more, they run the risk that the latest recovery will evaporate as quickly as previous ones have once policy pump-priming slows down.
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The numbnut Bernanke and his entourage at the Federal Reserve responded to the Saudis increased production by devaluing the Greenback to keep oil unaffordable. I almost think the “Jew” is in with the Iranians. Dog and Pony show for whoever… and I’m referring to Glencore, Vitol, Trafigura, the Koch Industries, Quantum Funds and Soros, Cargill, Nobel, Goldman Sachs, J. Aron, Salomon Brothers, J&S Group…..
idiots. IF they all put a fraction of their wealth into funding companies, our economy would be robust and at least some of us can finance these oil prices. but since insider trading is still LEGAL for commodities….well, they’re going to have overpriced oil and no buyers. Thank God it’s not a perishable. Food speculators are even bigger idiots.
The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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