Expert opinion. Jin Speling

Expert opinion. Jin Speling
"The Fed and the ECB - two banks, one oil problema"

Jin Speling, was chief economic adviser to former U.S. President Bill Clinton, is a senior member of the Council on Foreign Relations and the analyst "Bloomberg News"

High oil prices are down-known desire of American President Harry Truman on one-economist, who has never offered a solution "on the one hand, on the other side."

Oil prices are twofold: on the one hand, they can increase prices throughout the economy, accelerating inflation and justify more stringent monetary policy, but on the other hand, they could reduce consumer spending, slow the nascent growth and provide a reason for monetary relief.

Hence, the recent rise in oil prices could trigger "on a single continent, one on another continent, another" - the gap between the focus on economic growth the U.S. Federal Reserve system, and more focused on inflation, European Central Bank.

Earlier this month, Federal Reserve Chairman Alan Greenspan raised the issue of oil prices, raising concerns about inflation, when he said that "the constant increase in energy prices is an element of concern in the painting costs.

Away from a compromise
But last week, observers Federal Reserve, seemed to return to the announced position that higher energy prices will do more than Greenspan's caution in raising rates. Why? The increase of 0.6% in consumer prices in May, which almost spilled at the core of inflation volunteer at the modest 0.2% - and zaveritelnye speech Greenspan, that the movement was far from a compromise.

It is hardly news last week was necessary to conclude that the cost of energy is not likely to prompt the Fed to raise rates faster than the projected 25 basis points per meeting. First, some analysts point out that investment in the growing knowledge-intensive sectors have made the U.S. economy less energy - energy consumption per dollar of real gross national product fell from 1973. by 46%.

Oil Addiction
During the same period, we have also become much more dependent on foreign sources of oil, which means that profit from price increases pumped foreign producers, not returning to the American economy. "Goldman Sachs Group Inc." estimates that net oil imports actually increased as a percentage of gross domestic product from 0.9% in 1970. to 1.2% in 2003., assuming that the impact of oil prices on U.S. real income, if anything, slightly higher than in 1970.

"Merrill Lynch and Co." recently forecast that the price of oil at $ 40 a barrel could reduce growth in gross domestic product in 2004. approximately 0.5%.

In addition, increases in energy prices could have an even greater impact on demand than economists expected, because the effect of his pockets, which have higher prices at filling stations or in the accounts for the heat, can affect ordinary families.

Difficult to answer
In his speech in April 2002. Greenspan more than hinted that economic models can not fully capture the impact that the increase in energy prices could have on consumer demand. "Sensitive response of the U.S. gross domestic product to energy prices," he explained, "is much more complex and may be quite different response of households and businesses at an extraordinary price growth. Macroeconomic models typically do not cover the effect of sudden and significant change in oil prices the economy. "

Finally, even though we are three years in exceptional circumstances, monetary, vyalaya weakness in the labor market has not been completely changed to three months of consistent growth in jobs. Real weekly wages actually fell in December 2001. And labor force participation is the lowest in 1988.

As the head of the Federal Reserve, Donald Kohn at the beginning of the month "the economy continues to be visible, although weak and declining."

The budget deficit
And with the restoration, so depending on the percentage of sensitive economic sectors such as housing and cars, the Fed has cause for concern - as the purchase of these expensive items would be affected, since the market fully adjusts to the long-term problem of a large budget deficit, even if returned to steady growth .

On the other side of the Atlantic, energy prices could force central banks, to fear inflation more than slow growth. While the European economy has recently seen a modest recovery, 9% of th unemployment and annual growth in gross domestic product to 1.3% in the first quarter, which could imply that the European Central Bank would focus more on economic growth.

Back in April, the ECB has taken into account calls for lower rates, and since then, rising oil prices have increased the percentage of inflation to 2.5% per year, the highest for two years. With the objective of inflation close to but below "2%, European Central Bank, it is unlikely, would decline in rates and may even consider the possibility of their recovery by giving Greenspan and ??? with him one more reason to fear the aggressive compression of the economy.

ECB President Jean-Claude Trichet recently reiterated that "whatever happens, our main task is to prevent repetitive effects, which would have higher inflation, a permanent feature of our economy and that will hinder us to ensure price stability."

The moral of all this is that oil prices always require that the representatives of central banks "have two hands" - to weigh the "stagnation" against inflation. " Different responses to oil prices on both sides of the Atlantic have much to say about the global monetary policy for many months in advance.

bloomberg.com