Fuel Prices and the Impact on the UK Economy

Petrol pump - UK Van Delivery

The cost of fuel affects everybody. The only difference is whether we directly interact with the price or not. For those of us who choose to drive, the cost of petrol and diesel are a daily headache especially over recent years when the price has only appeared to go one way. We see the price at the pump and we know whether or not the price per litre is higher than last time we filled up. For those who travel by bus and train, the price of your ticket is influenced in part by the cost of fuel. You don’t interact with the direct cost of the fuel, but when bus fares go up, it’s part of the reason. Even if you never use motorised transport, the cost of fuel is part of the price you pay for absolutely anything that needs to be moved. The bread and milk you buy in the shop has spent most of its existence travelling from where it was made, to the shelf of the supermarket. Somebody charged somebody an amount to make that happen.

The cost of fuel therefore has a significant place in the economy as the vast majority of goods rely on logistics and are priced accordingly to include this. In short, if fuel prices rise, so too does the cost of goods. This has the potential to create strong inflationary pressures if the price rise is sustained.

It’s worth mentioning that steady inflation isn’t dangerous to an economy, quite the opposite. But sustained, spiralling inflation will have a negative impact on virtually every macroeconomic variable used to analyse performance.

Controlling Inflation

Since the credit crunch took effect in 2008, interest rates have been kept low in an effort to stimulate spending and sustain GDP growth. At the time, the economy was in recession so inflationary pressures were expectedly low. However, today’s economic growth is positive and so the playing field has changed.

To control inflation, interest rates could be increased which typically lowers spending with the tradeoff being reduced GDP growth. At this time of economic uncertainty as the UK goes through Brexit, this is likely to feel undesirable. The pressure that increased fuel prices exert on the economy may be temporary and as such no intervention may be needed. If the analysis shows that there is likely to be a sustained, substantial increase in fuel costs, then action will almost certainly be taken, but won’t be taken lightly.

Fuel prices are studied in some depth and the way it is covertly integrated into supply chains means fluctuations are more significant than most people would consider at first glance.

Government Intervention and Taxation

Whilst the price of fuel is dictated by market forces, the government levies a tax on fuel known in the UK as fuel duty. Cutting this duty can have a notable impact as this effectively makes fuel cheaper therefore cutting the cost of logistics.

This is where the government has direct control to some extent of the price of fuel. However, cutting this would result in a reduction of tax revenue and so a tradeoff must be negotiated.