Newspaper article The Evening Standard (London, England)

Oil and Pound Line Up Perfect Storm for Consumers

Newspaper article The Evening Standard (London, England)

Oil and Pound Line Up Perfect Storm for Consumers

Article excerpt

Byline: Russell Lynch

HEADING abroad on summer holidays, or about to fill up the car? Then you may not be experiencing too much of the economic "feelgood factor" on everybody's lips at the moment.

House prices and High Street spending are on the rise, and shoppers are feeling a bit more flush as the price of their bricks and mortar tick higher. Hell, the sun's even shining. But a problem is looming in a nasty dual squeeze for consumer wallets.

The pound is down significantly against the dollar in the past month as the US Federal Reserve's hints on reining in stimulus prompted a sell-off -- even if last night's comments from chairman Ben Bernanke muddied the water. The new Bank of England Governor's first dose of Carneynomics also told us interest rate rises are much further away than financial markets thought. Meanwhile, oil is on the rise: after dipping below $100 a barrel in the spring, Brent crude is now at a worrying $108, a threemonth high fuelled by the political turmoil in Egypt.

It won't be long before sterling's woes and sustained higher crude oil costs both find their way into petrol prices -- the biggest visible measure of inflation in the country. With wages currently growing at just 0.9% in the quarter to April, just a third of the current 2.7% rate of inflation, the prospects for household spending look far less certain later this year.

People have already been digging into savings to fund consumption, underlined by the steep fall in the savings ratio to 4.2% in the first quarter of the year. They can't keep doing this.

It's not just about petrol though. Anything with oil in it, or priced in dollars, will become dearer as both factors combine to push up import prices across the board -- giving us another nasty dose of imported inflation while our major export markets in the eurozone struggle for momentum.

Until recently, pipeline price pressures had been easing. The Bank has the ability to "look through" temporary spikes in inflation above the 2% target but if these feed into higher inflation expectations, how long will rate-setters be able to keep their foot on the monetary accelerator? …

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