With inflation at a sixteen year high, when will we see the full benefit of plummeting oil prices?

Inflation reached 5.2% in September, its highest level for 16 years, to dish out a sound beating to the government and Bank of England’s inflation target (just 2%).  Presumably the Governor of the Bank of England, Mervyn King, is getting writer’s cramp from all the explanatory letters he has been sending to Number 11 Downing Street.

Plenty has been written about the whys and wherefores.  It’s essentially down to the price of oil and a reflection of the fact that practically everything we take for granted in our developed economy is affected by price moves on the wholesale energy markets.  The obvious increases in the cost of petrol and home heating is really only half the picture, food too has had its say – largely because much of our food production relies on oil.

The effects of rising fuel prices in particular are being keenly felt.  Most of us have endured not one but two significant hikes in home heating bills this year, whilst the price of a tank of petrol or diesel has gone through the roof (remember when £1 a litre was seen as expensive? That would be a bargain today, with average prices standing at around £1.05).  Today, more than 3.5m households officially classified as living in fuel poverty.

That depressing fact is barely tempered by news that forecourt prices have started to fall – by about 10p so far, from a high of £1.20 a month ago.  That price drop seems all the more paltry when you consider that the price of wholesale oil has plummeted over recent months, down from a high of around $147 per barrel in July to just under $100 per barrel today.  But hold on just a minute.  That’s a fall of around 30%, whilst petrol prices have only fallen by 8% and home energy bills have not changed at all.  Surely some mistake?

Strangely this clear disparity has received little attention in the media – certainly compared with the coverage the price hikes got.  But is it wrong of us to expect the price of a basic human necessity to closely mirror the cost of production?  Is it OK that the fuel and energy companies are clearly creaming off the top in what is surely a huge money making ‘opportunity’.  Of course, this is what happens when you give away so much control over something as basic as energy to private companies – they are quick to put the prices up, but strangely reticent when the opportunity to cut them comes along.  And yet Ofgen assures us that there is ‘no price fixing cartel’ in operation.

The good news is that economists do expect inflation to fall back significantly over the coming weeks and months –driven by the now falling oil price and reduced demand as we all tighten our belts for a bumpy ride ahead.  That will allow further interest rate cuts, which should make life easier for anyone looking for a new mortgage, and tougher for anyone looking for a safe place to park their savings and get a decent rate of interest.

Small wonder then that Gordon Brown has demanded that the big six energy suppliers start to cut prices, reflecting the falling price of oil, and pleaded with the OPEC countries to resist the temptation to drive oil prices back up by cutting production.  At the same time, motorists are demanding that the price of petrol falls back to levels more reflective of the production cost.  In some cases, this issue has led to some rather bizarre forms of protest, including the rise of the Fuel Phantom – a masked mystery waving £50 notes and paying for people’s petrol.

So it seems that the price of heating our homes and running our cars will start to fall.  It may not be in time for the worst of the winter, so it’s hardly any wonder that many people have been casting round for cheaper alternatives.  In particular, sales of wood burning stoves have rocketed this year – and are expected to reach 190,000 by the end of 2008.

Actually it’s not a bad idea, on a couple of scores.  First of all, once the installation cost is out of the way, wood is a reasonably plentiful fuel source, particularly in rural areas, so it is relatively cheap. Secondly, as long as the wood being burned is from a sustainable source or is, for instance, from construction waste, it is carbon neutral.  Surely this has to be one of the few ways to spend less money and save the planet?

If you are worried about paying your fuel bills this winter, there is help available.  Many of the relevant contact details are included in a previous blog entry.

Update: Petrol prices fall below £1.