Although oil prices have risen steeply this year, inflation is unlikely to pose a threat to fixed-income investors for some time, says Carl Weinberg, chief economist at High Frequency Economics.
“We have seen oil rise from Christmas lows of just under $35 a barrel to a current level around $52,” he points out. “Normally we would be shocked at a 50 per cent rise in the price of anything. But crude is so far off its peak last summer that unless you think its is headed back towards $140 a barrel, you have to concede that energy will subtract from perceived inflation for a long time to come.”
Mr Weinberg says that if oil prices remain at $52 – and the dollar remains constant – they will stay below year-ago levels right through to October. “Since we think of inflation as the year-on-year change in consumer prices, this 12-month change in the oil price is what directly affects our perception of inflation.”
He adds that as much of the world’s oil now comes from places outside Opec’s control, the cartel is struggling to rein in supply.
“Amid a severe global economic contraction, we think demand for oil is falling faster than Opec can cut supply. We cannot forecast any substantial rise in crude prices from current levels – thus year-over-year prices should decline until the early autumn, at least.
“That means good news for bond investors – in the form of a constantly falling perception of the inflation rate – lies ahead.”
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