As a manifestation of this, China’s energy consumption per head in 2009 was half that of the UK level, having been just a fifth a decade earlier. Moreover, demand tends to be relatively price-inelastic, at least in the short run, though over a longer time frame there is surely some scope for increased substitution towards more energy-efficient practices. The immediate prospects for oil prices are, though, likely to hinge on supply conditions. Oil stocks are at reasonably healthy levels and can be utilised to meet short-term demand. More importantly, OPEC is believed to have spare capacity equal to around 5% of consumption, compared to a long-run average level of nearer 3% (Chart 5). That is more than enough to meet any shortfall resulting from the withdrawal of Libyan supply from the market (around 2%  BIS central bankers’ speeches  3  of total oil production). But if the present political upheavals were to disrupt Saudi Arabian supply, then that could potentially lead to very sharp upward pressure on oil prices. Prospects for the medium to longer term must depend on how quickly new sources of supply can be brought on stream to meet growing demand. The investment cycle in oil extraction is relatively long, and the current elevated level of prices is in part a reflection of low investment a decade ago.
As I said at the beginning, the annual variation of the Consumer Price Index excluding Food and Energy (CPIEFE)—our measure of core inflation that deletes the prices of food and energy from the CPI—has remained below 2%, with annual inflation still negative for goods and persistently around 3% for services. The CPI has approached 3%, mainly driven by the behavior of the more volatile prices (Figure 9). The peso depreciation has an effect on the revision of the short-term inflation outlook. By the end of this year, the annual variation of the CPIEFE is forecast to be at 2.7% (2.3% in June) and that of the CPI, at 3.1% (2.8% in June). Once both indicators converge to 3% during 2019, they will remain in the neighborhood until the end of the projection horizon (Figure 10). It is very likely that in September the annual CPI inflation rate will be temporarily above 3%, because of the low basis for comparison left by the unusual behavior of some foodstuffs in 2017. Regarding monetary policy, we think that the evolution of macroeconomic conditions makes it less necessary to maintain the current monetary stimulus. Therefore, our working assumption for the MPR is that it will begin to increase in the coming months and by 2020 it will stand near its neutral level—ie. between 4% and 4.5%. This assumption is not essentially different from the forecast a few months ago, as it implies gradual increases in the policy rate associated with the recovery of the domestic economy.