High energy

Rising utility bills, which are behind today's unexpected rise in the consumer price index, could be just the beginning, writes William Keegan

The Bank of England and London's financial markets got a shock today when the Office of National Statistics revealed that the consumer price index rose 0.3% in June to 2.5% - well above the official 2% target.
The unexpected rise comes at a time when some members of the monetary policy committee (MPC) had begun to wonder whether their earlier fears about the impact of higher energy prices had been groundless.
But the ONS makes it quite clear that the rise was driven by a record 9.8% annual increase in utility bills, undoubtedly reflecting the impact of higher fuel prices

The MPC in general and the governor of the Bank, Mervyn King, in particular, have been concerned for the past year about the possibility that higher oil and gas prices might be reflected in demands for higher wages.
This was one reason why the relatively new committee member, David Walton, who died suddenly last month, had moved from a dovish to a hawkish position on interest rates.
But recently, some MPC members have found themselves hard-pressed to discern the effect of higher energy costs in the CPI.
All this has changed. There is a traditional saying among economists and commentators that "one should not pay too much attention to one month's figures". Some years ago, the veteran Cambridge economist and former Treasury official, Professor Wynne Godle, wrily observed that experience had taught him "not to ignore one month's figures".
This CPI figure is undoubtedly a shock to the system and could hardly have arrived at a worse moment since the escalation of the crisis between Israel and Hizbullah in Lebanon has once again highlighted the west's vulnerability to higher oil prices.
That most experienced observer and Middle East analyst, Crown Prince Hassan of Jordan, said last night that, if things get much further out of hand, the price of oil could rise to $200, against the $75 to $78 range that itself represents a tripling since 2002.
There are some unfortunate historical pointers to the connection between upheavals in the Middle East, the price of oil and the impact on western economies.
The first "oil shock" of 1973-74 was associated with the disruption to supplies occasioned by the 1973 Arab-Israeli war and the decision of Arab countries to use the "oil" weapon. They were also angered that the devaluation of the dollar, in which oil was priced, had devalued their earnings.
The 1979 oil crisis was sparked off by the impact on the market of the previous year's Iranian revolution, which led to oil shortages, panic buying by western consumers and two formal price rises by the Opec cartel.
The 1979 world economic summit in Toyko was dominated by concerns about the price of oil and security of supply and the Group of Seven commited itself to precise targets aimed at limiting imports of oil.
Moving forward to 2006, the theme of the just-ended G8 summit in St Petersburg was the security of energy supplies. That is ironic considering how Russia scared western Europe by temporarily cutting off gas supplies to the Ukraine in January.
It was useful to have so many European customers at this year's G8. Although most commentators believe that the communique's pious words on energy mean little, in the end it will be in the interest of both Russia and western Europe to keep negotiating on energy. They need each other.
Earlier fuel price rises are now hurting and events in the Middle East could provoke an international economic crisis. Prince Hassan was warning about the dangers, rather than forecasting a $200 oil price, but the dangers are there for all to see.
Let us hope that the effort of the summiteers to induce a new sense of urgency into the Doha round of world trade talks pays off.
After all, it was partly because President Giscard of France hoped that leaders could overcome impasses at a lower level that the first summit was held in his country in 1975.
· William Keegan is senior economics commentator for The Observer.