Will Petrol Prices Drive the Gilt Market

Have you noticed that it’s costing more to fill up your car?

Petrol prices have moved from 143p to 153p over the last month, or around 7%. In the US (where fuel taxes are lower), diesel prices are up 20% from their summer lows.

While economists might think of inflation in terms of annual price changes, consumers usually do not. For a regular purchase such as petrol, it’s often about how much more it costs you now, in comparison to your previous visit to the forecourt.

With rising fuel prices eating into disposable incomes, supermarkets CEOs might tell you that there’s a quick transmission mechanism into the average basket size when petrol prices spike, and that rising motoring costs seem to have a disproportionate effect on consumer behaviour.

Just when the post-COVID and Ukraine triggered inflation seems to be easing, along comes more cost-push inflationary pressures, particularly from steep rises in diesel (which will eventually work its way into core inflation), that will give the Fed and BoE a moment to reflect. 

What this is likely to do, particularly if the price of oil continues to rise, is to encourage central banks to keep rates higher for longer, which may keep pressure on the fixed income markets, especially UK Gilts and US Treasuries.