Hard-hitting effects of oil prices

Some leading economists have been hinting recently that signs of stagflation are showing up in the USA and the European Union countries.

This condition, which is a combination of slow economic growth and high inflation, was last experienced in the late 1970s and early 1980s. In that period, two oil-price shocks put the economies of the major industrialised countries and most of the developing world into a stagnation mode and unleashed a protracted bout of high inflation.
It took a strong dose of restrictive monetary policy by the US Federal Reserve and similar medicine by other monetary authorities to squeeze out the inflationary pressures, but not without a painful recession in the USA and most developed economies.

We in Jamaica felt the effects in terms of the sharp downturn in our bauxite industry as aluminium consumption slumped with the fall in industrial production. One major benefit was that oil prices, which had increased more than tenfold between 1973 and the early 1980s, collapsed by 1985, bringing great relief to our balance of payments.

In the current scenario, inflation pressures are again being fuelled by high oil prices. But this time around it is not OPEC’s control of production that is the driving force as was the case in 1973 and 1979. Oil prices are now reflecting what is a tight supply-demand balance coupled with risk premiums linked to geopolitical tensions. In addition, the activities of commodity traders have intensified the impact of these factors on prices.

Meanwhile, grain purchases by China have increased as domestic output has not kept pace with rising consumption, and a hike in food prices has contributed to the highest rate of inflation in that country for over a decade.

Indications are that this tightness in world food supplies is not going away soon.

The Caribbean region has been slow to recognise the shifting balance in the world’s food supply situation.

Jamaica Observer