UK could face years of high oil and food prices

Over the past couple of years many households in the UK have had to get used to facing strained finances, with many struggling to keep on top of payments, bills, and debts. It seems that our finances have been hit with one thing after another over the past two years.

From August 2006 until July 2007 the UK saw interest rates rise five times, each time by 0.25%, leaving borrowers and homeowners facing crippling repayments on their mortgages and loans.

The interest rate then remained at 5.75% until December of last year, when thankfully it began to come back down. A series of three 0.25% interest rates cuts saw the base rate fall to 5% by April, although it remained static for May and June of this year. However, whilst the interest rate may have started to come back down, many other costs have rocketed, leaving most consumers still struggling to make ends meet financially.

In January of this year the major energy suppliers announced that the cost of wholesale energy had rocketed, and as a result households saw the cost of their energy bills rise dramatically, with significant hikes to both gas and electricity bills.

In a further blow the energy firms have now announced that rising costs mean that they will have to increase the cost of energy usage again, and consumers have been warned that significant hikes in the cost of electricity and gas usage are due to take place again in the autumn.

Household finances have also been hit by hiked up water bills, increases in council tax, soaring food prices, rising borrowing rates, and rocketing fuel prices, leaving many on the financial brink. Worse still, a government report has indicated that the UK could face years of high oil and food prices, as circumstances are likely to stop the price of commodities falling back to their previous levels. With rising borrowing costs, rising shopping bills, and other increasing costs the financial future could look very bleak for many households and families.

The Treasury report stated: ‘Expert views and market expectations reviewed here suggest that prices are likely to remain higher than their historical averages, if lower than today’s levels, with continuing and perhaps more frequent shocks.’ It also said that this was driven ‘by continuing strong demand and a continuing slow supply response,’ adding: ‘It will be an ongoing challenge for supply to match demand at affordable prices.’

The level of inflation has already soared out of control, and is set to soar even higher, according to some industry experts. The government target on inflation is 2% but at the moment the rate of inflation stands at 3%, which is a full 1% over the target. But things could get far worse, as some officials warn that the rate of inflation could rocket to 5% or thereabouts and could stay there for a long period of time. If this does happen then rather than the interest rate going down, as many are hoping that it will over the course of the year, the government may be forced to push interest rates back up to try and curb inflation levels.

One industry official said: ‘If oil and food prices were to carry on rising, UK consumer price inflation could rise above 5% and remain above its 2% target until 2010 and beyond, with disastrous consequences for the real economy.’

On the other hand, if the Bank of England is forced to increase the base rate again the economy will continue to suffer. Many industry groups have already slated the central bank for keeping rates on hold for the past two months, claiming that the rate of inflation is being pushed up by internationally determined prices such as those on food and oil, which means that keeping rates on hold or increasing them will have no real effect on inflation. These groups have accused the Bank of England of focusing too much on inflation levels and not enough on the flagging state of the economy.

However, there are also groups that have supported the central bank’s decision to keep rates on hold for the past two months, stating that this is a very challenging time for the Bank of England and the MPC because they have to balance keeping a lid on inflation with trying to boost the economy.

In the meantime the quarterly poll from the Bank of England has shown that households across the UK are now bracing themselves for some dramatic price increases over the next twelve months, and this will have a variety of knock on effects, not only on the general economy, but in specific areas such as the housing market and on bad debt levels.