Don’t bank on cheap oil
I wrote in my first letter of the year, that there is nothing more dangerous than a consensus. I pointed in particular to the perfectly reasonable-sounding view that inflation would fall fast this year.
The arguments make good sense at first glance (our banks are still deleveraging and the VAT increase will fall out of the numbers in Britain). But my point was that much of the inflation we have seen in Britain has not been demand- but supply-driven. It comes from the government (tax rises), from our weak currency and from the high price of imported energy.
Most analysts at the time were convinced that falling Western demand would keep oil prices down and energy cheap and that would be enough to flatten inflation. I worried that geopolitical tension would push oil prices up. Iran was being more than usually obstructive and there was more trouble everywhere from Syria to Nigeria and Kazakhstan.
So far, that appears to be exactly what has happened. The International Energy Agency (IEA) has “reason to believe” Iran has tested a nuclear detonation device. Iran says its uranium enrichment is all about peaceful energy. Israel is unconvinced. Confrontation looks possible.
• Read the full editor’s letter here: Don’t bank on cheap oil.