January 11, 2008 | posted by Michael Baxter in Automobiles, Oil |

As you probably know, Indian company Tata Motors, revealed the world’s cheapest car earlier this week.

Tata, which is also currently seen as sitting in poll position in the race to buy Jaguar and Land Rover from Ford, says it can sell the car for 100,000 rupees or $2,700 (£1,300).

It’s good news, surely; the car will mean that millions of Indians and other people across the developing world will suddenly find they can afford a car. (The vehicle will, however, need some tweaking before it meets safety standards in the West, meaning that we won’t be seeing the little wonder machine around the streets of Britain for some time.)

But not all are impressed. Some point to the lack of safety features in the car. According to The Times, India already, “has 8 per cent of the world’s vehicle fatalities and less than 1 per cent of its cars”.

Others point to the car’s likely impact on the environment. The India Daily said, “The $2700 car from Tata is a dream for Indians. But it comes with a false American dream that can push India towards environmental catastrophe.”

But here is the irony. The new car is yet another example of how the developing world is exerting a deflationary effect on the global economy. Presumably other car manufacturers will try to match the Tata move, and the price of cheaper cars will fall.

And as, literally, billions of, or at least a billion, people join the world’s consumer society over the next few years, cheap cars, such as the model announced by Tata, will have helped facilitate a massive rise in vehicles on the world’s roads, creating even greater demand for oil.

Many argue that the price of oil is bound to fall soon, that supply can easily meet demand, and yet the Tata announcement shows how great the potential for future demand for oil is.

It also illustrates how two contradictory forces are at work. India and China are helping keep global inflation down through supplying cheap goods, but at the same time are pushing inflation up through demanding oil, not to mention other commodities.

It also goes to show the error in the argument that oil inflation does not mean interest rates should rise, because it is a one-off. In fact, oil inflation is the flip side of deflation in manufactured goods. You can’t dismiss oil inflation as a one-off, and then point to all the other deflationary forces as a reason to cut interest rates, when these other forces are just as much a one-off.