Britain: Inflation and petrol price increases

Further quantitative easing in doubt as petrol prices near record high

The Bank of England could be prevented from boosting the economy with another round of QE if inflation rises

the Guardian,

10 September, 2012

Petrol pump prices jumped to 139.7p a litre this weekend, within 3p of the 142.5p record set in the spring, according to figures from the AA.

The cost of diesel also rose as Europe's major refiners blamed hurricanes in the US and a string of refinery shutdowns for a spike in the cost of crude oil.

A rising oil price will spook the Bank of England, which has relied in its inflation forecasts on a fall in oil prices linked to falling demand across the world. The central bank's monetary policy committee, which sets interest rates, could be prevented from adding to its £375bn programme of quantitative easing to boost lending in the economy if inflation takes hold, analysts said.

Higher pump prices will also add to concerns that the UK will join continental Europe in a stagflation trap as inflation rises while growth remains flat.

Fears that the economy will remain in recession for the rest of the year were heightened by a report on Monday that found optimism among UK businesses has hit a 20-year low.

BDO's optimism index, which predicts business performance two quarters ahead, fell to 89.1 in August from 93.1 in July. This is the sixth consecutive month that the data has registered a drop, with a four-point plunge from 93.1 in July. BDO's output index – which predicts short-run turnover expectations – also fell sharply, to 90.8 in August from 93.9 in July, reaching its lowest point for 40 months.

Better news has come from a survey showing industrial production on the rise in August and the latest Lloyds TSB regional purchasing managers' index, which showed higher levels of business activity in all of the English regions except the north-east during August.

But surveys showing a rise in activity have tended to be only shortlived and only partially recovered falls in previous months.

Petrol is a key factor in household budgets and transport industry costs and rising prices can severely damage economic activity. Petrol had fallen to a low of 130.81p and 136.12 for diesel in the summer.

Last week, European petrol refining margins rose to their highest level for five years, blamed on the impact of Hurricane Isaac, upcoming refinery maintenance schedules and refinery fires in North and South America.

Edmund King, the AA's president, said: "Once again UK drivers find themselves being dragged over a barrel, as does business and Bank of England inflation targets. Last week, government statistics showed that traffic on minor country roads fell by 5% – such was the impact of record high fuel prices on rural communities."

The Treasury has come to rely on the Bank of England to increase quantitative easing to boost the stagnant UK economy and will be concerned that it could be forced to abandon tentative plans for a further round of QE later in the year.

MPs will debate the effects of the oil market on the price of petrol and diesel on Thursday amid claims that a lack of capacity in the oil refining industry has encouraged them to push up prices rapidly in reaction top falling supply.

And a Westminster Hall debate on Wednesday looks at the effect of rising prices on rural communities.

King said: "The Office of Fair Trading has launched an investigation, but drivers are growing weary of words – they want action. The Justine Greening initiative to introduce a wholesale price track this year and make fuel prices more transparent would have been a big step forward, but now it's on hold."

The AA said the loss of productive capacity following the closure of the Coryton refinery in Essex and refineries in the US and on the continent was unjustified.

King added: "Why can't planning and storage prevent maintenance schedules from driving up the price of petrol before they actually happen? Or is yet another convenient excuse for market speculators to make a killing at the expense of the consumer, business and economic recovery?"

Business confidence lowest in 20 years - survey

Optimism among businesses slumped to a 20-year low last month, according to a survey by accountancy group BDO

Reuters,

10 September, 2012

BDO's Optimism Index, which measures business performance expectations two quarters ahead, fell to 89.1 in August from 93.1 in July, the sixth consecutive month showing a drop, BDO said in a statement. Figures above 95 indicate a return to growth.

Meanwhile, BDO's Output Index, which measures short-term turnover expectations, fell to 90.8 in August, its lowest level in 40 months, from 93.9 in July.

The survey comes as Britain's economy, facing headwinds from the euro zone debt crisis and the government's tough austerity plans, struggles to emerge from the recession it slipped back into late last year.

Data on Friday showed British industrial output grew at its fastest pace in 25 years in July, while the National Institute of Economic Research said Britain's economy grew in the three months through August.

"The government's efforts to cut current spending may not be working out quite as planned, though we believe that the strategy in essence remains correct," said BDO partner Peter Hemington.

"But we have long been concerned that the cuts to investment spending were too drastic and that steps to redress this have been taken too slowly. We welcome positive signs that the government now wishes to boost its investment in UK infrastructure."