Oil, wheat and milk take toll

Oct 17 2007 by Iain Laing, The Journal

BUSINESSES and householders have received mixed news on the cost of living after record oil prices took the shine off lower-than-expected inflation figures in September.

The Bank of England’s inflation benchmark, the Consumer Prices Index (CPI), stood unchanged at 1.8% last month – below the Bank’s 2% target for the third month in succession, according to the Office for National Statistics.

But economists sounded the alarm as oil climbed above $87 a barrel yesterday amid political tensions between Iraq and Turkey.

Alongside higher oil prices, petrol costs have risen since the beginning of the month because of a 2p-a-litre increase in fuel duty. Every 3p extra on the cost of a litre of petrol adds 0.1% to the CPI index.

JP Morgan UK economist Malcolm Barr said: “With the increase in fuel duty and higher spot oil prices to impact over the October and November releases, our short term forecast shows headline inflation moving back above the 2% target.” Falling gas and electricity bills filtering through to households after an energy price war earlier this year have so far helped keep inflation below target since July.

But as the year-on-year comparison between fuel bills slips out of the ONS figures, inflation targets will come under heavier strain from oil and food costs.

A host of major food companies have said soaring wheat costs will push up the price of bread after bad weather and demand for bio-fuels hit supplies.

The ONS data also showed a record 4p increase in the price of a pint of milk last month as supermarkets raised costs. Overall prices for milk, cheese and eggs rose 6% last month, while average costs for butter and margarine soared 15%.

After the summer’s turmoil in financial markets, businesses and homeowners had been hopeful of an early interest rate cut from the Bank’s policymakers after signs of a slowdown in the housing market.

But other experts said high oil prices – as well as the record increases in dairy prices – would add to the inflationary pressure and deter the Bank from cutting rates until early next year.

Global Insight’s chief UK economist Howard Archer said: “Record high oil prices and higher food prices seem likely to exert upward pressure on inflation over the next few months.

“It is premature to sound the all-clear. We suspect that the Bank will only act before the end of this year if it becomes clear that growth is taking a major hit from the credit crunch.”

Meanwhile, the headline measure of Retail Prices Index inflation – seen as more representative as mortgage costs are included – fell back from 4.1% in August to 3.9% last month.

The fall followed the Bank’s decision to hold interest rates at 5.75% last August. This contrasts with a year ago, when mortgage lenders passed on the Bank’s August 2006 rate rise to homeowners the next month.