At the start of the year I wrote a list on our blog of the things we should be worried about. It was 14 items long. Number six was social unrest in emerging markets. Rising food prices might irritate consumers in developed countries, I said, but they starve people in many developing countries. And nothing drives revolt quite like fear of hunger.
As ever, it is hard to sort out exactly what the trigger has been for the revolutions in the Middle East, but inflation has had something to do with it. It is bad enough being tyrannised and unemployed without being threatened by hunger too. So what next?
The main non-humanitarian concern for us is the oil price. What’s happened so far doesn’t necessarily add up to a sustained supply shock (most of these countries will have no financial choice but to pump oil regardless of who is in charge). But that doesn’t mean it won’t become one. Take Libya. As we go to press it is looking like a possible candidate for civil war. James Fergusson, an expert on the Middle East and north Africa, points out that Gaddafi sees himself as a revolutionary leader “who must continue the struggle”. That doesn’t suggest he’ll be joining Mubarak on a Sharm El Sheikh beach anytime soon.
The optimists tell us we shouldn’t fuss too much. Libya only produces 2% or so of the world’s oil, so the effect will be marginal. But prices of commodities are made at the margin and global stocks are already tight. What if the wild fire of revolution really does spread to Saudi Arabia and the Gulf states? Or what if, at the very least, all the upheaval changes the climate for investment in finding and developing future oil supplies? Either way, I think we need to keep assuming high and rising oil prices.
That means more supply-side inflation for Britain. It isn’t quite like the 1970s yet. But it could be soon. The price of everything we need (food, oil) is rising fast. But real wages are still falling and most of us are no longer being permitted by the banks to bump up our incomes with credit. Note that the latest British Bankers’ Association report shows an “emphasis on repayment rather than borrowing”. It is entirely possible that the British population, along with the rest of the West, will accept this nasty fall in their standard of living with no protest. But it is worth remembering that most inflationary cycles – whether they are driven by external forces like this one or by domestic demand – end in much the same way, with a wage-price spiral. Number seven on my New Year list was “social unrest in the developed world”.