Inflation fear as oil and food prices soar

By LUCY FARNDON
Updated: 02:36 EST, 6 January 2011

Petrol prices could smash through the £1.30-a-litre barrier within weeks as surging food and energy costs place household finances under renewed pressure.

Oil prices: The price of crude oil is expected to rise again.

Economists sounded the alert that the fragile economic recovery could be put at risk, after the price of food rose to a record high and oil edged closer to $100 a barrel.

Oil prices in London have already climbed to $95 a barrel, with the average price for a litre of petrol rising to 127.21 pence, sparking predictions that inflation will jump to 4% this year.

Crude oil prices jumped again yesterday, after strong US employment numbers led to gains on Wall Street and commodity markets.

London crude rose by as much as $1.67 a barrel to trade at $95.20.

David Buik, market analyst at BGC Partners, said it was just a matter of time before this filtered through to higher petrol prices at the pump.

He said: 'I wouldn't be surprised to see petrol rise to 130p per litre in the next couple of weeks.

'It will take time for the Organisation of the Petroleum Countries and oil producers to take action to calm prices and if we see any further bad weather it will just be used by the forecourt retailers as an excuse to put up prices.'

He added that if the Government wanted to 'take the pressure off the motorist immediately, it has the wherewithal to do it' by temporarily cutting fuel duty.

Experts warn that the timeyear lag between rising crude and pump prices means further rises are likely.

The increase in VAT to 20% this week has already added an average of 2p per litre to the price of fuel, according to the AA.

It says a typical 50-litre tank costs £8.59 more to fill than ago and warns that 'lower income drivers have reached breaking point'.

Oil cartel Opec is under pressure to pump more crude oil in order to calm the rise in oil prices, but so far its members have shown little indication that they want to do so.

Amid predictions that inflation will jump to 4%, some policymakers believe interest rates need to be raised straight away.

Others say the Bank of England must hold fire, arguing that any hike in the cost of borrowing will cripple consumers and could cause numerous companies to go under.

Yesterday, the United Nations' food agency said it was concerned about rising food prices. Its warning comes after the International Energy Agency made clear earlier this week that 'oil prices are entering a dangerous zone for the global economy'.

The UN food agency's index of a basket of foods - which includes cereals, dairy, meat and sugar - hit a record level in November.

Rising oil prices are also putting upward pressure on food prices, because the cost of transporting and processing crops has risen sharply.

And rising crude prices are hurting businesses and individuals, who look set to face even higher petrol and food costs in the coming weeks.

With household finances already stretched, families may well have to make cut backs on non-essential items in order to pay their petrol and food bills.