Outlook: Benign and painful

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ONCE UPON a time the fact that oil prices had more than doubled in a year would have been the backdrop to an unfolding economic crisis. As recently as 1990 the rising cost of oil played a part in the onset of recession across the industrialised world. How times have changed since the bad old days. Even the most pessimistic forecasters do not foresee anything more than an additional half per cent on the inflation rate, at the outside, as a result of the present surge in oil prices and some other commodities.

Part of this reflects the current state of demand. While Europe is recovering strongly, growth in the US is expected to be moderate. Although Asia is also recovering after the 1997-98 crisis, it is not buoyant enough yet to contribute to the kind of generalised growth that can trigger inflationary pressures rippling out from commodities markets.

Another improvement between now and then is the greater credibility of anti-inflationary monetary policy. The 1970s and 1980s may be forgotten to most of us, but to central bankers they are still fresh in the minds. The war against inflation was a hard won thing, and they won't let it be reversed easily.

On the contrary, many commentators believe central banks are being, if anything, too hawkish. A third, and perhaps the most important, difference between now and then is increased competition, globalisation, the Internet and all that. If the price of oil has to surge at all, it could not come at a better time than the middle of a dramatic improvement in the supply- side of the economy.

Still, if the big picture is benign, it is not at all rosy for an awful lot of businesses, M&S being only the most high-profile example. Higher raw material costs imply a squeeze on profits for companies that cannot pass on price increases. Manufacturing, especially the most energy-intensive parts of industry, is already badly hit by the phenomenon.

Retailers unable to pick and choose between competing suppliers also find their margins under severe pressure. As a result, traditional supply chains are in a state of turmoil, even revolution, and there is intense pressure to harness the new technologies to improve productivity. Businesses that refuse to change inevitably die, but rarely before has the choice been so stark, obvious or pressing.