Falling oil prices eases inflation pressure

The recent fall in the price of oil and other commodities is good news for the markets as it eases inflationary pressures, according to Jeremy Tigue, manager of the Foreign & Colonial Investment Trust.

He commented: "Not everyone feels the same as there is an argument that the fall in oil prices is a result of collapsing demand as the world slumps into recession. Although I can see the logic behind this view, I am more optimistic," he explained

Tigue believes that the biggest problem facing the global economy is still the continuing effect of the credit crunch. The most effective way for central banks to deal with the aftermath of the credit crunch is to cut interest rates. However, with the oil and other commodity prices rising so fast, central banks have been nervous about the effects that rate cuts could have on inflation.

"The fall in the oil price eases these inflationary concerns. To the extent that it reflects a slowdown in demand - caused by weaker economic activity and/or more efforts to save energy - then that itself will ease inflationary pressures even further," he explained. "This means interest rates could come down further and faster than expected a few weeks ago and this will encourage equity and bond markets. However, while the global outlook is improving the UK economy continues to struggle. The recent fall in the pound has made the problems worse".