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Tuesday, 1 February, 2000, 22:44 GMT
The demon is out there

oil rig Oil: The single biggest driver of inflation in the 1970s

By the BBC's Rodney Smith

Inflation is bad. We all know that. Do we? Some people, like a colleague of mine, a prominent broadcaster, remembers what happened in the 1970s and 1980s with nostalgia.

Like many of us, she is an inadequate saver, and a consummate borrower.

She remembers how large-looking loans dwindled away, while the only significant asset she owned, a house, shot up in value.

rodney smith Rodney Smith: Inflation is on the up in Europe
She is not among those whose savings are destroyed, or whose employers are forced out of business, by galloping inflation.

So it is worth considering that the inflation we thought dead, and whose return some might welcome, may be about to escape again.

Oil prices

The single biggest driver of the inflation that plagued most of the world during the 1970s and into the 1980s was the huge increase in oil prices by Opec producers after the Arab-Israeli War that started on 7 October 1973.

The effect of expensive energy invaded all industries, all business, all aspects of modern life. Almost all prices were affected by it.

When pressures on individual incomes became too great, already powerful trades unions argued for and won wage increases that compounded the problem.

Inflation became built into expectations, became planned for and became a structural part of economies.

It was only beaten by the very harsh treatment that invariably produced unemployment.

It could happen again, because the world economy is wide open to attack from high oil prices again.

Euro effect

This is made potentially made worse by, of all things, the euro.

The weak euro, at 97-cents US or 95-cents - some think it could even lower - mean that essential imports will rise in price in Europe.

And poor old Europe is wide open to attack. Everywhere there are signs of incipient inflation, not much, but an uptrend, creating a fertile field for other forces like weak currency and high fuel costs.

It's happening already. In Germany, import prices rose 1.6% last month, the third increase of more than 1% in four months. Why? Oil and the euro. These numbers are being repeated among other European Union member states.

This highlights another highly unwelcome development.

Pay settlements of 3% -plus demanded by powerful German industrial trades unions, principally the engineering union IG Metall, are a huge new threat to stable prices in the principal anti-inflation European economy.

One effect you can bet on - the Bundesbank is piling on the pressure for the European Central Bank to raise interest rates at next month's meeting, and by at least 0.5%.

But back to influences the ECB and European governments can't control. Some commentators in the oil market are saying world reserves have been hugely overstated; that high oil prices could be here to stay.

More likely, say others close to Opec, the oil cartel is a differently composed, more economically sophisticated organisation than it was 25 years ago.

It represents a wider spread of interests geographically than it once did, and its supporters reckon it would open the taps at or before $30 a barrel.

Even at that level, that's three times what the price was at the start of 1999.

The Western economy is much less sensitive to oil prices than it was a quarter century ago. But the impact will continue to be felt indirectly. Base metal prices are rising already. Higher oil prices will emphasise that.

Goldilocks should start to worry.

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See also:
03 Dec 99 |  Business
When is a weak euro a problem?
11 Nov 99 |  The Economy
Oil prices at three-year high
13 Dec 99 |  Business
Soaring oil price hits factories
12 Jan 00 |  Business
Call for petrol price probe
13 Jan 00 |  Business
Opec determined to keep oil price high
16 Dec 99 |  Business
Oil hits US trade gap

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