Rising energy prices fuel inflation fears

With the price of crude oil hitting $100 per barrel, European citizens must prepare for large increases in gas and electricity bills in the coming weeks, with major companies in the UK and France already announcing plans to raise prices by as much as 27%.

On 5 January, Britain’s fourth largest energy supplier, Npower, raised its electricity prices by an average of 12.7% and gas bills by 17.2%, saying it had been “forced to put up prices because the cost of buying energy on the wholesale markets has increased dramatically”. 

Indeed, like oil, which reached a record high of $100 per barrel on 2-3 January, the wholesale prices for gas and electricity have risen by 60% and 66% respectively since the beginning of 2007. Energy companies say they now have no choice but to pass on some of the costs to consumers. 

Other large UK energy companies have said they are likely to follow in Npower’s footsteps, with price rises of around 15% expected to be announced next month. 

The French government has also agreed to a 4% rise in gas prices since the beginning of the year, but leading gas supplier Gaz de France criticised the raise as insufficient, saying it would not allow it to fully make up for increased wholesale costs and would provoke a loss of around €90 million in the company’s operational results for the first quarter of 2008.

UK Chancellor of the Exchequer Alistair Darling is said to have called for a meeting with the British Gas and Electricity Markets Authority industry regulator Ofgem to determine whether the rises are justified or whether companies are seeking to boost their profits by overcharging consumers. 

But Energy Minister Malcolm Wicks said it was unlikely the government would intervene. “Price changes are commercial decisions for companies and we must recognise the fact that global demand is pushing up energy costs worldwide,” he told the Observer. 

Trade unions and consumer bodies in both France and the UK have criticised the price hikes as “socially indefensible” and “economically unjustified”. 

However, higher energy prices are increasingly likely to become a reality in the coming years because, although the oil price has slipped back slightly to $98, many experts predict it will rise still further, impacting on living, transport and food prices. 

According to a poll cited by the Financial Times on 7 January, rising electricity prices are topping the list of concerns for Germans in 2008. Businesses are now paying 65% more for their power than when liberalisation started ten years ago, while consumers have seen their electricity bill soar by 50% since 2000, the paper notes, saying that “liberalisation fatigue is already tangible in the German government”. 

The rise in energy prices is starting to heighten concerns about inflation. In the euro area, the annual inflation rate in December 2007 stood at 3.1%, well above the 2% target of the European Central Bank, according to Eurostat estimates published on 4 January. 

Speaking the next day, ECB President Jean-Claude Trichet said inflation should stay “significantly above 2% in the near future”, owing mainly to rising energy prices. “The recent substantial increase in oil and food prices […] is having a strong upward impact on inflation in the current context,” Trichet said. 

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