UK vehicle fuel prices heading well above spring high
Simon Ward
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Higher global crude oil costs, a fall in sterling against the US dollar and coming hikes in VAT and fuel duty suggest that the average price of unleaded petrol will rise from £1.191 a litre in November to more than £1.25 in early 2011, well above the May peak of £1.215. The average diesel price is already above its spring high.
Based on the spot market price, adjusted for current VAT and fuel duty rates, the retail unleaded price looks on course to rise to about £1.23 – see chart. The VAT increase and fuel duty hike of 0.76 pence a litre from January will add a further 3.3 pence, suggesting a retail price of about £1.26 barring a spot market slide.
Such an increase would not provide a further boost to annual CPI inflation because petrol prices rose similarly steeply a year ago. Forecasters' previous assumption, however, that a slowdown in petrol inflation would partially offset upward pressures on the headline CPI rate is no valid. The view here remains that CPI inflation is likely to reach 4% or more early next year, a prospect endorsed by the MPC's Andrew Sentance in a recent article.
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