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Fears Of Spillover Effects From Higher Oil Prices And Rising Inflation Expectations Linger.

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Fears of spillover effects from higher oil prices and rising inflation expectations linger. With oil prices expected to remain at or above the $60-per-barrel area over the course of 2006, and the oil shock looking more permanent, the key issue is whether, and to what extent, there will be further impact on the core inflation index, as well as on wages.

While the main concern in 2005 was growth, inflation risk is expected to be the primary focus in 2006 -- particularly since the oil price shock of 2004-05 is looking more permanent. This, along with a recovery in its principal export market and a likely return to trend growth, poses significant risk that elevated energy prices will be passed through to the remainder of the economy. As such, we expect the Bank of England to be ever more vigilant about anchoring inflation expectations.

Below-trend British growth currently should continue to subdue upward wage pressures from permanently higher oil prices during the first half of the year. With labor markets still relatively tight by historical standards, and as growth reverts back to trend over the course of the year, wages are expected to realign into 2007.

Meanwhile, absent a spike in wages or a renewed downturn in consumer spending, the latest inflation report for November supports a steady hand by the Bank for the foreseeable future. As such, we expect the Bank to stay the policy course in 2006, with significant risk of a preemptive 25-basis-point hike in the policy rate back to 4.75% before yearend.

And this does not seem to take into account, rising rates in the Eurozone and the US.

Edited by BubbleTurbo
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Yes this is exactly to the point and with tension in Iran over nuclear, oil price is staying up.

We were told in December that the main reason why CPI fell from 2.3% to 2.1% was due to the reduction in the price of oil reflecting in lower petrol prices at the pumps. Around here unleaded is back to 89.9p this week so we should expect to see CPI rise again in January's figures. If it does any chance of a base rate cut will be gone.

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That is exactly what they are. Someone has said that not a single economist has ever predicted a recession/depression until it began.

As the late Herb Stein, economic adviser to President Nixon, once remarked: "Economists are very good at saying something cannot go on for ever, but no good at all at saying when it will stop."

Another Steinism, which ironically came out of a question on how the US current account deficit of the 1980s might most appropriately be addressed, was that he belonged to the "don't know school of economics".

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