Oil Price Increase Spark Renewed Fear of Inflation

An unexpected increase in crude oil prices forced manufacturers’ costs upward in the month of January resulting to a new inflation warning for the Bank of England one day following its decision to put an additional £50 billion for the struggling economy of the United Kingdom.

Last month’s Iran tensions which threatened to block the Strait of Hormuz as a response to the sanctions imposed by the United States have increased crude prices.

An extremely cold weather in European countries aggravated the pressure as shortages in gas also pushed many nations to consume oil to produce electricity.

According to the Office for National Statistics, the increase in crude oil prices comprise almost the entire 0.5% growth in the input costs of manufacturers for that month. Factory gate’s output expenses also grew by 0.5% which is higher than the City analysts’ anticipated increase.

Financial information Markit’s chief economist Chris Williamson said that oil stays as an issue as the greater than anticipated figures in January partly reflect the rise of oil costs caused by Middle East tensions. With Brent crude price per barrel at $119, a growth of almost 10% for the present year, increasing oil prices could make the Bank of England see a sharper fall in consumer inflation than presently anticipated this year.

Factory gate crude prices increased at a yearly rate of 4.1% in the month of January. This is a decrease from the 4.8% expected in the month of December and the lowest level since the month of November 2010.

Several policymakers have identified the potential for a current crude oil price increase. Many fear that such an increase can keep the entire inflation level high even though the Bank, led by Governor Mervyn King, still believes that prospects are not strong enough to start a new set of money printing that will protect Britain from the eurozone crisis’ effects and shore up its impending revival.  The official measure of the Bank’s inflation is presently at 4.2%. This is more than two times its 2% target.

According to Samuel Tombs, a UK economist in Capital Economics, pricing intentions of manufacturers according to surveys still point to more decline in future output inflation.

Overall, there is not much in the figures at present that will oppose the view of a sharp fall in consumer prices this year.

By Chris Termeer