Psst, Brendan Nelson, Mal Turnbull and the Daily Telegraph: inflation is rising. Just take a look at what’s happening to oil prices and interest rates.

Mal and Brendan have been busy excoriating the Rudd Government for raising inflationary expectations while their economic advisers at the Tele have been trying to pin the blame on the Reserve Bank and Governor Glenn Stevens for lifting interest rates too high.

But in their zeal, this trio of economic ostriches has been ignoring what’s been happening to oil prices lately: they’ve gone up and continue to rise. In fact, in the past year oil has risen from around $US62 a barrel to more than $US120. You have to be pretty blind to have missed that rise, but Mal, Brendan et al give every impression of having done so.

Futures prices hit $US122.76 a barrel in New York overnight before easing to around $US121.84. An influential Goldman Sachs oil analyst forecast that oil could go to $US200 a barrel (And to be fair, a Citigroup analyst said that could happen, or oil could drop to $US40 a barrel)

The Australian Bureau of Statistics pointed out in the March Consumer Price Index report that;

Over the twelve months to March quarter 2008, the transportation group rose 6.8%, with the main contributors being automotive fuel (+18.9%).

Automotive fuel rose in October (+2.0%), November (+5.8%), December (+4.7%) and January (+1.3%), fell in February (-2.7%) then rose in March (+2.8%). The automotive fuel expenditure class contributed 0.38 index points to the increase in the All Groups CPI in March quarter 2008.

All Groups rose 1.3% in the March quarter, so a quarter of the increase was down to ‘automotive fuel’.

And this after the strong dollar (thanks to the resources boom and rising interest rates) has clipped a few percent off the impact of that doubling in oil prices. In the past year, the Aussie dollar has risen from around 80 US cents to almost 95 US cents last night.

Goldman Sachs reckons the world is in the midst of a “super spike” in oil prices, but according to US media reports, Tim Evans, an analyst at Citigroup, countered Goldman’s analysis with a note predicting that crude prices could as easily fall to $US40 a barrel as rise to $US200 over the next two years because supplies are, as Evans put it, comfortable.

But Goldman’s analyst, Arjun Murti, has some form in getting oil calls right. In April 2005, he predicted the oil market was in the early stages of an unprecedented rally that would send prices from a then-record of about $US57 a barrel to $US105. He did add in his latest report that the surge in prices to $US150 to $US200 a barrel would eventually cause demand to drop and the price to fall sharply.

In Washington, the US Energy Department’s Energy Information Administration forecast oil prices will average $US110 a barrel this year, up $US9 from last month’s forecast and that these high prices would slow American demand for petroleum products by 330,000 barrels a day this year.

But this fall in the US, the world’s biggest consumer, would not impact total global demand because strong demand for oil from China, India, Russia, Brazil and the Middle East will underpin the current high prices and see world demand grow by 1.2 million barrels a day this year.

So there.