| The December consumer price index data was | | | | the summer and rising world consumption. Despite |
| released today in the UK showing that annual inflation | | | | this, it is likely the price of oil has risen above the |
| remained at 2.1 per cent in the month. Annual inflation | | | | level suggested by simple supply and demand. The |
| has remained at 2.1 per cent for three months now, | | | | weakness of the dollar and the wider United States |
| but is likely to pick up as the year continues, | | | | financial system has encouraged investors to move |
| particularly following Monday's producer price index | | | | to safer products such as commodities such as gold |
| and continued high price of oil. | | | | and oil. Nevertheless as the US economy slows in |
| Nevertheless, there are signs that inflation should | | | | 2008 so will their demand for oil. A significant |
| moderate in the second half of the year. The biggest | | | | slowdown will dampen prices. Many forecasters are |
| drivers of inflation in the first half of 2008 will be | | | | now suggesting that oil prices will drop by about 25 |
| food and fuel. Food prices are very hard to forecast | | | | per cent in the year. As a result by the final quarter |
| given the variability of the weather, however, there | | | | of 2008, the year-on-year price of oil could be having |
| are a few of factors that should help to increase | | | | a negative impact on inflation. |
| agricultural yields. | | | | The rate of inflation is important because it is the |
| The first is that the European Union has decided to | | | | key measure in determining the stance of the Bank |
| suspend its annual subsidy to farmers that leave ten | | | | of England's Monetary Policy Committee (MPC). With |
| per cent of their farmland fallow. | | | | the consumer price index currently above the target |
| The second factor is the fact that record highs in the | | | | of 2.0 per cent the MPC will be keeping a close eye |
| price of wheat will encourage farmers across the | | | | on this measure. Nevertheless, this is unlikely to stop |
| globe to plant more and to reduce the percentage | | | | the MPC from cutting interest rates at least twice |
| share of their crop being used for bio fuel - | | | | (and probably more) in 2008. The MPC is willing to live |
| particularly as the price of oil is likely to fall back as | | | | with above target inflation in the short-term to |
| the world economy slows. | | | | maintain economic output and stave off a recession. |
| Demand is unlikely to be significantly reduced by the | | | | Tomorrow's labour market statistics will be particularly |
| slow down in the world economy, as food is a | | | | interesting to see whether the credit crunch and the |
| necessity. Therefore the supply side will be the key | | | | wider problems in the economy are starting to have |
| to reducing food prices. | | | | an impact on employment. I would suggest that |
| Oil prices have risen significantly, almost doubling over | | | | seasonal employment in December is likely to have |
| the past twelve months. The price of oil has been | | | | hidden some of the early signs of weakness. We will |
| supported by a number of supply issues throughout | | | | see... |