http://www.bloomberg.com/apps/news?pid=206...&refer=home

So China puts fuel prices up 18% leading to a $4 drop in oil. Who will absorb those costs, China or the western consumer.

So when house prices drop it's a good thing as it's moral and fair and a return to normal.

When commodity prices drop it's the beginning of a depression?

Why is more expensive Chinese imports deflationary?

Agree. Absolute garbage.

Demand destruction.

I think oil will get cheaper for the CHinese as the RMB will quadruple over the coming years. Oil will go up in price, but will become very expensive for Americans and the British. I cant see demand destruction. I can see periods of reduced demand. However, 90 million new cars come onto the roads every year.So even if this number drops to 70 million, you have to remember that this is still a huge increase in demand for oil. Oil is still cheap at these prices. Peak oil is a reality. Many people think peak oil relates to how much oil is left in the world. I m not saying there is not uge amounts of oil left. There are billions of barrels left. However, the daily demand is huge and it will get much larger in the future. Daily demand will grow. However, peak oil relates to the maximum amount that can be supplied in a day compared with demand. For geological reasons, we are at maximum capacity of supply. Daily demand is greater than supply. Demand is 87 million barrels per day and supply is 85 million barrels per day. Dueto the inelastic nature of oil, econometric models have showed that a small reduction in supply or an increase in demand leads to proportionally larger move in the price of oil. This explains why the news of possible disruptions to supply in Nigeria for example leads to a huge spike in the price of oil. The econometric models show a 1% increase in demand, or a 1% reduction in supply leads to a 7% increase in the price due to the inelacticity in the price of oil. So, I would say that the price of oil is cheap now relative to what it will be. As the Asian currencies increase in value, and the USD falls, oil will become cheaper for the BRIC nations, leading to an increase in demand. Estimates show that in Asia, 500 million cars will be brought onto the rds in the next decade. I lived in Bangkok and around 7000 thousand cars a a week came onto the roads.

The Western world will absorb these prices also, due to a weaker currency. The Uk does not have the capital formation to produce what is needed to be self sufficient. The Uk became net oil importer of oil in 2007 for the first time, due to peak oil in the North Sea. This means huge amounts of sterling leaving the UK just to pay for energy. The Uk cannot produce what it needs, so we are at the mercy of the BRIC nations and Asia in general. The cost of building a maufacturing base again would cost billions and billions. In order to build the economy again, in order to produce, we need to go through an L-shaped recession where a huge increase in the savings rate occurs, leads to capital formation and increases productivity. However, in the coming years, I think it will be a painful time.

Deflation will come along in the end,in another few years or more, but only as a necessity after a high period of high inflation.

Well I think that Merv was implying during the week that the only thing that would take care of UKplc's inflationary problems was a recession.

Whoops quickly edited to add that the only alternative would be much firmer monetary policy.

Tell me it's garbage in 12 months time.

Surely the $ would have to increase to absorb these costs.