Anyone who believes that rising oil prices are “transitory” needs to check facts and not forget that easy money and low energy prices were the fuel for high earnings and high growth during the boom years 1987 to 2007. Now fast forward to 2011 and we have high energy prices and continued low rates, despite the European Central Bank's hike yesterday.
The price of crude oil is what you have to watch for from here on in. The average price during the first three months of 2011 was USD 86.84 (January: 84.47, February: 81.32 and March: 94.72). April is no exception, looking already set to break the 100 dollar mark, thereby bringing the year-to-date close to 93/95.
The energy issue has become one of not only too much oil demand, but also one involving real supply issue risks - in terms of not being able to actually ship the oil due to geopolitical tensions.
Energy and overall commodity price rises are more likely to stop this game of Monopoly than rising rates. Traditionally, higher interest rates stop economic growth. This time however it’s more likely to be exorbitant price rises in energy and commodities, which effectively represent a direct tax on consumers and companies.
Note how companies like Nike, H&M and Wal-Mart have all already expressed concerns about margin pressure and too high input costs. Such companies are the pinnacles of low and efficient pricing but due to the situation at hand they may no longer be able to sustain current retail prices. Soon we will also see airlines' so-called “surcharges” coming into play at the retail level.
So keep watching those energy prices while they fly!
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