A few weeks ago, the outbreak of war in Georgia would have created panic in the oil market. Yesterday, traders shrugged off the threat to Western supplies through the BTC pipeline.

The reaction lends weight to those who argue that the 20 per cent fall in the crude price over the past month will not be reversed in the short term and that the big question now is: how low can it go?

Quite a bit lower seems to be the answer if, like Alan Greenspan, the former Chairman of the US Federal Reserve, you believe that the spike in the price was driven partly by speculative investors who are now cashing in their gains.

The spike has had one beneficial effect. It shocked oil consumers into cutting back. Even those petrol junkies, American motorists, are using less. It has also prompted some increase in supply, with Saudi Arabia pumping 500,000 more barrels a day than three months ago. All of which has convinced many investors that the oil party is over, at least for now.

The price has also been hit by the rise in the dollar, which continued yesterday as investors digested the gloomy outlook for the eurozone economies.

The fall in the oil price is hugely important for central banks grappling with resurgent inflation at a time of slowing growth.

In Britain, figures today are expected to show that consumer price inflation in July topped 4 per cent, double the Bank of England's target. Factory-gate prices yesterday showed why the Bank is expected to give warning that inflation could reach 5 per cent later in the year.

However, there was a glimmer of hope in yesterday's figures. Although producer price inflation increased to 10.2 per cent last month, there was an unexpected decline in manufacturers' costs between June and July. And that was before the full effect of the oil-price fall could feed through.

It will not stop inflation rising over the next couple of months, not least because of increases in utility bills. But it should mean inflation falls sharply in 2009. Economists say that if the price of crude stays where it is inflation should be down to 3per cent by next June and to about 1.7 per cent by October.

The fall could be steeper still if the economic slowdown accelerates. Two surveys today will show housing market activity at its weakest in four decades and a continuing fall in high street trading.

In its quarterly Inflation Report tomorrow, the Bank is expected to make clear that inflationary pressures leave it no scope to cut interest rates in the short term.

But if the oil price keeps falling, the Bank could soon start to relax.

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