That Escaped Rabbit

So, the result of mild weather has directly led to oil prices falling to a two-year low, stuck in the $50-55 barrel range. Natural Gas has suffered, too, with lower use of central heating.

But what goes around comes around. What the weather has given with one hand it has taken away with the other. Because of scorching drought in Australia, the grain harvest was severely affected. That has sent the grain price soaring, which will feed through into higher prices for all staple produces.

That is from post on this blog, in January of this year.

Let me turn to the reasons for the rise in CPI inflation to 3.1 % from 1.8% a year ago. As discussed in our February inflation report, part of that rise reflects an unexpectedly sharp increase in domestic energy prices during the second half of last year, more than offsetting a fall in petrol prices. Part reflects a rise in food prices cause by a weather-induced global reduction in supply.

That was Mervyn King's letter to Gordon Brown, explaining the reasons for the CPI surpassing 3% despite the recent interest rate rises. Glad to see he's caught up.

So, whilst we are on the subject, where will inflation go next? Well, I am not as easily convinced as many analysts that the bank are on top of the problem, and that we will see a reduction coming through very soon. The high energy prices from last year will fall out of the system, which will undoubtedly have some sort of an effect in reducing it. That's hoping, of course, that oil prices stay at their current level all summer. To achieve that we need to buck the trend for oil increasing during the summer months, and we would need to avoid anything which could lead to oil prices hitting $70+. So, no wars, Hurricanes, supply problems or sweltering heatwaves. Do you feel lucky, Mervyn?

Then there is dear old Gordon's taxes. Even if the oil price doesn't reach $77 dollars a barrel, and even with the fact that oil is cheaper for us now that the Pound is so 'strong' (actually it's the Dollar that is so weak), there is a very strong chance petrol will hit £1.00-a-litre.

I can see, therefore, inflation hanging around the upper 2% range, for the near future. Coupled with the UK's rising trade deficit and with unemployment rising again, the economic future is not looking particularly bright.