I've been drinking bubble tea these few weeks. Why bubble tea? The prices have fallen from a high of $2.50-$4 in 2001 to $1.50. The duo-core laptop I was eyeing last year has dipped below $1000 to $890 at the recent PC show. I've been saving close to $300 a month on taxi fares as the fare hike inspired me to switch to taking public transport - yes I've learned to shut off my mind from the crowd and really focus on my free copy Today to timewarp myself so that the longer journey is more tolerable. If you have a lot of time there is a barber in Bedok (Block 631) who offers haircut at $2.80....I have not resorted to that yet I'm still paying $10 per haircut at one of those "Japanese" style 10 minute per cut barbers.
The recent CPI report from the US shows a large jump in headline inflation (0.6%) but no increase in core inflation which remains at 0.2%. Core inflation excludes food & energy and is the more important number as it tells us if inflation has begun to spread. In the US as in Singapore, inflation is very much concentrated in food and energy but has not spread to other things.
In Singapore I notice that the big jump in hawker price occurred after the GST hike and then stayed there. Similarly taxi fare hikes were one-off, that single hike probably caused demand to fall enough for them not to consider further hikes. I don't think they dare to hike the public transport & ERP cost anymore - the last hike pushed Singaporeans to the threshold of wanting to throw eggs at Raymond Lim. The point I'm getting to is we are not seeing the kind of infectious spread of inflation in the 70s. Business are unable to raise prices because the consumers are so stretched they will trade down, substitute or simply stop buying. American consumers are so stretched due to rising oil prices and declining values of their homes, any price increase will lead to a collapse in demand.
The key difference between now and the 70s is the wage-inflation spiral. For the past 3 decades, the power of unions have waned and workers are no longer able to negotiate for higher pay. While this may seem like a bad thing for workers, when it comes to inflation, this lack of power to raise wages is key to preventing inflation from spiralling out of control. The vicious cycle goes like this - inflation = workers ask for higher pay = business raise prices = more inflation...and so on. Today when prices are raised beyond a certain level, demand collapses....the economist call this demand destruction.
What about high oil prices?...can this go on forever?
On the day when oil reached $139 per barrel, I noticed a few interesting pieces of news:
1. Airlines announced withdrawal of a large number of routes due to high fuel prices.
2. Indonesia, Malaysia remove fuel subsidy because the govt could no longer "tahan" the cost. Overnight fuel in Malaysia cost 50% more. I guess Malaysians will be driving less.
3. I went to a Pasar Malam (night market) and every car was offered with a CNG option that will save the driver 60% in fuel cost. Several of my colleagues were pushed to switching to CNG cars
4. OPEC convene emergency meeting.
That $139 per barrel flicked a few psychological switches that might has seeded the demand destruction for oil. I've been looking at the cause of increase in price of oil - there are 2 key reasons I believe that have contributed to this. Contrary to what most people think, I believe that OPEC, Chinese & Indian demand are not the primary factors that drove oil prices from $27 to $139 in 6 years. The first reason is the consolidation of oil industry that resulted in the top 6 oil giants now producing more oil than OPEC. It is found that these giants have not increase production & refining capacity and they left a number of leases on oil reserves unused and these were taken back by the US govt. The reason is a 2% reduction in production leads to a 20% increase in prices and once the oil companies were consolidated with fewer independent players, there was little motivation to increase production - since they have much more to gain by not expanding supply, they simply allowed the price of oil to rise to maximise their profits. The 2nd reason is speculation - hedge funds, pension funds have poured billions into the commodities funds which can only go long (purchase) oil and commodities. The oil prices have reached a level that threatens the global economy and governments have no choice but to intervene in the marketplace or see their economies strangled by high oil prices.
This is the point they call "make or break". Food and energy inflation will be defeated either with a painful slowdown or some intervention from govt. Already we are seeing riots in Indonesia, protests in Malaysia and S. Korea - it is time for governments to act fast or see more pain.