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THE GUARDIAN |
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COMMENT |
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The long good buy Leader The
Guardian The announcement that
British Gas is to increase its
residential prices by another
12% this year, and electricity
prices by more than 9%, will
send a chill through the
wallets of its customers -
even if the increase is no
surprise for those who have
been watching wholesale prices
creep upwards. Coming at a time when
international oil prices are
hovering around record levels,
up by 40% from a year earlier,
the prospect of more expensive
energy prices throughout the
economy sounds a dire note.
But it is not just energy
prices that are rising: around
the world, commodity prices
have also been rising strongly
during the past year. From
soybeans to iron ore, the
costs of raw materials have
been steadily increasing. A sign of these
rising times is the news that
Britain's exports of scrap
metal are on course to top the
£1bn a year mark, putting it
on a par with this country's
exports of machine tools and
appliances. What this shows -
other than the long observed
decline in the British
manufacturing sector - is the
appetite for humble scrap for
furnaces in places such as
Japan and Turkey. But what is good news
for Britain's scrap merchants
and car wreckers is not
necessarily best for British
consumers. The global
background of rising commodity
prices - and the resurgent
fuel costs driving up the
transport charges in moving
them around the globe - is
likely to cause a knock-on
effect in terms of rising
prices generally. While this is already
being felt at the petrol pump,
and shortly in gas and
electricity bills, the
cumulative effect may well be
a gradual rise in the overall
price level, and presumably
lead to a surge in inflation.
The increased gas and
electricity charges, if passed
on to consumers across the
board, will add something like
0.3 percentage points to
overall inflation on its own,
while higher oil prices can be
expected to add a similar
proportion. Does this mean we
should brace our selves for a
rerun of the energy shocks of
the 1970s? Almost certainly
not - especially as fuel
prices are still far below
1970s levels when adjusted for
inflation. What it does mean
is that the triple crown of
rock-bottom commodity prices,
weak inflation and low
interest rates that the UK and
the rest of the world's
developed economies have
enjoyed for the last six or
seven years has come to an
end. Since the implosion
of the "Asian tiger"
economies in 1997, followed by
the disruption in Russia and
other emerging markets, the
industrialised nations have
benefited from the background
of lower prices, which
encouraged a brief but robust
period of economic growth.
Now, though, many of the
tigers are roaring again, and
have been joined by China, the
biggest beast in the jungle,
and by a recovery in Japan.
Brazilian soybean farmers and
iron ore producers are better
off, while Britain's consumers
are likely to pay higher
prices. This does not mean
that we can expect some sort
of Soylent Green-style
dystopia in the short term, or
even the long term. Higher gas
and oil prices does mean less
money for consumers to spend
elsewhere. The country will be
a little worse off, in terms
of lower growth than in recent
years. That is bad news for
the government's fiscal
position, if it is banking on
projections of rising taxable
incomes to bail it out. Should
a sustained rise in the
consumer price index lead to
higher interest rates and
lower economic growth, then
the political fallout could
become distinctly
uncomfortable for the
government.
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