Indirect impact of oil prices

DURING an interview, the Association of Valuers, Property Managers, Estate Agents and Property Consultants president Datuk Siders Sittampalam pointed out that should oil price continue to trend downwards, so should prices of properties due to lower cost of production and logistics. This was debunked by his contemporaries. 

The relationship between oil and property price may be an indirect one, via interest rate because properties, being a big-ticked item, needs bank financing. When interest rates are low, there is no motivation to keep money in a bank. 

As inflation increases, so will interest rate. But with the sliding oil price today, inflation may slow. Interest rates may, therefore, remain low.

Here is a snippet on the relationship between oil prices and inflation from Investopaedia, the online investment website.

“The price of oil and inflation are often seen as being connected in a cause and effect relationship. As oil prices move up or down, inflation follows in the same direction. Oil is a major input and a commodity in the economy. If input costs rise, so will the cost of end products. 

“The direct relationship between oil and inflation was evident in the 1970s. The cost of oil rose from a nominal price of US$3 before the 1973 oil crisis to around US$40 during the 1979 oil crisis. 

“This caused the consumer price index (CPI), a key measure of inflation, to more than double from 41.20 in early 1972 to 86.30 by the end of 1980, a span of eight years. “To put this into perspective, it had previously taken 24 years (1947-1971) for the CPI to double.

“However, this relationship between oil and inflation started to deteriorate after the 1980s. During the 1990s Gulf War oil crisis, crude prices doubled in six months from US$20 to US$40, but CPI remained relatively stable, growing from 134.6 in January 1991 to 137.9 in December 1991. 

This detachment in the relationship was even more apparent during the oil price run-up from 1999 to 2005, in which the annual average nominal price of oil rose from US$16.56 to US$50.04. During this same period, the CPI rose from 164.30 in January 1999 to 196.80 in December 2005. Judging by this data, it appears that the strong correlation between oil prices and inflation that was seen in the 1970s has weakened significantly.” - The Star