On Wednesday, an organisation with great influence said nothing much. On Thursday, an organisation with supposedly no influence said something. Yet global markets gyrated to both announcements. First, during Ben Bernanke?s press conference, the Federal Reserve chairman repeated a well-read script. Investors sensed a nervousness over core inflation, which has risen by 2.5 per cent in the three months to May. Equities fell and the dollar firmed.
Then out of the blue the next morning the International Energy Agency announcedthe release of 60m barrels of oil reserves in the coming month, in response to supply problems in Libya. Brent crude for August settlement fell by $6 per barrel to $108. Yields on 10-year Treasuries tumbled to 2.9 per cent – ignoring the previous day?s consensus that the Fed now believes the deflation threat is dead. Equities fell further.
There are two big conclusions to draw from these successive events. First, politicians are getting worryingly desperate. There was no need for the IEA to release reserves. If supply shortages were in the offing, prices would not have been falling since April. And in the US, for example, the Libyan impact on refiners is negligible. About 70 times as much crude comes from the Gulf of Mexico and 13 times from Saudi Arabia. Having used every monetary and fiscal tool at their disposal since the crisis to no avail, the risk is that developed-world politicians become ever more populist in their attempts to keep their economies ticking over.
Second, do not dismiss deflation. Certainly core consumer prices are rising in America, Europe and elsewhere. Central bankers in general are probably too relaxed that recent pressures will be temporary. But things can change quickly, as this latest oil price drop shows. Politicians and the likes of the IEA should be very careful what they wish for.
? The Financial Times Limited 2011