Inflation Predictions Tristan on 02 Apr 2009 01:04 pm
Does The Weak Pound Mean Rising Inflation?
I filled up my car the other day and for the first time in a while I noticed that the price of a litre of petrol had risen to well over 90p. This took my by surprise as the price of petrol had been getting lower until recently, and I had rather hoped that for the health of the nation’s finances, it might stay low.
But with sterling being worth less than monopoly money at the moment, it’s no surprise that petrol prices are rising, you see, oil is traded on the global market in US Dollars, which have been getting relatively more expensive for us here in the UK. This pushes up prices at the pumps, though there is a bit of a lag due to the nature of forward contracts etc etc.
Another issue that is going to affect the price of petrol at the pumps is the fuel duty rise 1st April 2009 of 1.84p per litre on petrol and diesel.
I wonder how this will effect the consumer price index over the next few months? With the Bank of England doing everything within their powers to stop deflation and stimulate the economy, will the weak pound contribute to UK inflation thanks to higher petrol prices. It’s an interesting situation that we could be faced with, if the economy is still very weak and the pound weaker, we could see ever rising oil prices and that will lead to inflation. To combat this inflation, the BoE will have to raise interest rates, which will either lengthen or deepen the recession that we are in, or worse still both!
My suspicions are that eventually the government will ask the Bank of England to revert back to using the retail price index, and thus with house price deflation being fed back into the equation, they will have some justification to keep the base rate at it’s all time low of 0.5%, and thus the weak pound causing higher energy prices will not effect the inflation statistics as much and we’ll all be able to carry on delaying the inevitable.
