Bad inflation

On Tuesday, the deal was called dead on Iran’s willingness to regain pre-sanctions market shares. On Wednesday, OPEC agreed that crude-oil production had to be cut in order to lift prices. Some details still have to be cleared, but the press release states that the 14-member organisation is looking for limiting its production to between 32.5 and 33 million barrels a day. The news pushed oil prices up and, together with them, market readings for US inflation expectations. End of deflation threats? No so fast… Admittedly, in lifting some pressure on oil producers, either countries or firms, the rebound in oil prices is a clear positive for global financial stability. As for inflation, the push could prove both temporary and unwelcome. Energy inflation – as food inflation – has deflationary effects: as households and corporates cannot lower energy demand swiftly, their energy bills end up larger and rising energy prices tend to depress spending on other goods and services. That is the reason why oil shocks mean global demand shocks. Central banks from around the world do seek higher inflation, but not that kind. What they are seeking is good inflation, the kind that comes from dynamic demand and results in higher wages. Too strong a rebound in oil prices would prove achieving that goal harder, as faster energy inflation today would also mean lower core inflation tomorrow.

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