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This article was sent to Opalesque as part of Société Générale’s publication “The Economic News”. The author is Glenn B. Maquire, SocGen’s Asia Chief Economist.

Oil prices are now sitting on the psychologically important $100/bbl threshold. WTI is hovering just above it, but Brent Crude yesterday closed below $100 for the first time since April. Prices have dropped by a third in just two months. The drop will have significant economic repercussions.

The first implication: inflation will drop like a stone. Based on the current futures curve for oil prices, we have flat monthly CPI projections all the way out to May as energy deflation offsets rising core prices. Year-on-year CPI will dip below 2.0% by mid-2009.

The drop in inflation will in turn offer a substantial boost to real income. Usually, a big chunk of that passes through to consumption. A few weeks ago, we projected real consumption growth of 2.5% in Q4 after no growth in Q3. Our Q4 projections now look very conservative.

Declining oil prices will also have a substantial impact on the trade deficit. In fact, the drop will finally unmask the huge improvement in trade that has already taken place outside of energy imports.

The US trade deficit registered its low point in October 2005. Since then, the ex-petro deficit has shrunk by 53%! Yet the total deficit during that time contracted by only 15%. The rest of the improvement was gobbled up by soaring energy imports even though we impo......................

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