Following Iraq's invasion of Kuwait in August the oil price doubled. Most industrial economies were then already slowing. The oil price has since fallen back again despite the outbreak of hostilities in the Gulf in mid-January. These events have affected asset prices and exchange rates which were already coming under pressure from differential economic performance and, in the ERM, from the impact of German unification on demand there which contributed to the pressures leading to a rise in German interest rates at the end of January. US rates were again reduced at the beginning of February. This Assessment considers these developments as the context of the recession now evident in the United Kingdom and the policies appropriate to the reduction of underlying inflation as the twelve-month increase in the retail price index falls sharply.