September 3, 2008 | posted by Michael Baxter in inflation |

Well, actually, inflation in the UK has not peaked yet. Utility bills are still rising, and it seems the consumer price index may well hit 5 per cent within a few months – expect some nasty headlines when that happens. But, looking beyond that, it seems there are reasons to believe the index will then fall sharply.

Consider the price of oil. You remember what it was like earlier this year and last. The price of oil soared on the thinnest of rumours. You would have thought that earlier this week, as Gustav wailed its way inexorably towards the US, the black stuff would have risen in price.

You would have thought that, as the world’s second largest exporter of oil – that would be Russia – plays soldiers, and gives its tanks a good airing, and Vlad recalls the good old days when he was in the KGB, the price of oil would rocket. But, it didn’t.

Then, as that mother of a storm that was Gustav turned into something of a less-fiery Aunt, oil fell. All of a sudden, they are talking about $100 a barrel again.

As ever, there are plenty of reasons to fear this could change. Iran is trying to persuade fellow OPEC members to cut oil supply. Yet normally, even the whiff of a rumour about Iran and Venezuela working together would have sent oil soaring again.

It has been argued here many times before, at current levels oil is not affordable. Should it stay at the current price for an extended timeframe, the global economy will hit recession – and that will hit OPEC. If markets are left to their own devices, and political interference is kept to a minimum, oil will fall rapidly next year.

It is also very much in OPEC’s interests to see oil fall in price – although, in the longer-term maybe not in our interests. The longer oil stays at current levels, the sooner the West will develop alternatives. Solar and wind power may represent the potential for cheap energy for ever, they may represent the solution to global warming, but they would be bad news for OPEC.

So there are two reasons to expect oil to fall in price. Firstly, the credit crunch is causing demand to fall. Secondly, OPEC would be shooting itself in the foot if it tried to stop the fall.

But it is not just oil which is falling; wholesale gas, wholesale electricity and agricultural commodity prices have all fallen recently. Recently, the CBI produced data to suggest the core output price inflation is set to fall.

It will take time. It is like moving a massive ship – there is an extended time lag between a change in the factors that determine course, and the actual change in course. Let’s just hope that the UK can see a change in direction before it hits an iceberg.