Rise in petrol prices keeps UK economy on track for soaring inflation

3rd December 2010

According to expert calculations 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.

It's bad news for consumers and keeps the UK on track for soaring inflation in the new year.

Simon Ward, chief economist at Henderson Global Investors says his forecast for Consumer Price Index (CPI) inflation to hit 4% early in 2011 is still on track. And it's a view echoed by the Monetary Policy Committee's Andrew Sentance, as reported here in The Daily Telegraph. However, the expected rise in petrol is not the deciding factor, Ward says, as the hike has already been priced in, following last years' hike.

What is, he adds, is that forecasters' previous assumption, that a slowdown in petrol inflation would partially offset upward pressures on the headline CPI rate, is no longer valid.

As Ward explains: "Such an increase would not provide a further boost to annual CPI inflation because petrol prices rose similarly steeply a year ago.

"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.

"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."  

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