Petrol prices are inflicting huge pain

 
Allister Heath
BRITAIN is not quite America, where the price of petrol is one of the most important determinants of who wins elections. But the fact that one litre of unleaded now sets you back a crippling £1.29 is starting to become a major issue for the public here in Britain – and it is also beginning to hurt other parts of the economy, especially retailers.

In 2005, a litre of diesel cost 85.82p; today, you would have to shell out 134.41p, a development that is crippling transport firms and increasing costs throughout supply chains. A litre of unleaded petrol cost 81.44p six years ago; as recently as two years ago, after prices had plunged following the recession, a litre of unleaded was still retailing at just 86p. The price at the pump has rocketed by 50 per cent since then, punching a gaping hole in the finances of millions of motorists and diverting cash away from other purchases.

No wonder, therefore, that the distributive trades survey from the CBI – a good gauge of retail sales – showed a substantial slowdown in February. People are still spending more in shops but the rate of growth has slowed to a crawl. A similar survey out earlier this week painted a picture of a two-tier service sector economy: professional services are doing well but services to consumers are stagnating. Strong global growth and efficiency gains means that firms are flash with cash, despite higher costs, and are spending more – but individuals are being squeezed.

It’s not rocket science: prices are surging as inflation spirals out of control, led by much higher petrol prices. Post-tax, post-inflation, post petrol take-home pay is dropping at an accelerating rate; the tax and price index, an official measure of the cost of living, was up 5.5 per cent in the year to the end of January. Given that average earnings were up just 2.1 per cent, Britain faced a national pay cut of 3.4 per cent over the past year. There is less to spend on discretionary items after all the direct debits and essentials. It’s neither a surprise nor hard to understand why retailers will be facing a difficult 2011; even supermarkets will suffer.

Of course, there are also other pressures on consumer spending: some public sector workers who feel they may be at risk will be tightening their belts. Against that, the net number of jobs in the UK rose by 218,000 last year; as long as the private sector continues to create 3.8 net extra jobs for each that is lost in the public sector, the aggregate effect will mean more spending power.

There was some good news yesterday: crude prices fell back, thanks to Saudi Arabia saying it is in talks to compensate for lost Libyan output. King Abdullah’s massive £22bn in handouts may not have been enough to assuage all his critics, however. And even if the oil price stabilises, a huge chunk of the price at the pump is made up of tax – 58.95p per litre for fuel duty alone – which keeps going up. That is the real scandal.

Politicians and the media are obsessed with spending cuts, even though these will be worth only one per cent of total state spending in real terms in 2011-12. Yet the impact of inflation on incomes will be three times larger – and everybody is being hit. The coalition would be well-advised to remember the 2000 fuel protests: they almost destroyed Tony Blair, something that not even Iraq could manage.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath