In a rare piece of good news for the beleaguered British motorist, diesel prices have recorded their largest monthly decline in 26 years. The Office for National Statistics confirmed today that the average cost of a litre of diesel fell by 8.4 pence in April, the steepest drop since the dark days of 1998 when oil prices collapsed amid the Asian financial crisis.
This is not just a statistic; it is a fiscal transfusion for the household budget. For the millions who depend on diesel to commute or run small businesses, this translates into tangible relief at the pump and lower operating costs. Yet, as any seasoned market observer will tell you, such windfalls are rarely permanent.
The price fall reflects a global oil glut. Brent crude has slid by nearly 12% over the past month, driven by concerns over demand in China and the unlikely prospect of OPEC production restraint. The cartel, it seems, has lost its discipline.
Meanwhile, the pound’s recent resilience has further softened the blow. Sterling has gained ground against the dollar, making dollar-denominated oil cheaper for British importers. But here is the rub: this price plunge is a double-edged sword.
It may be a boon for consumption and inflation (which the Bank of England will welcome) but it is a stark reminder of the fragility of global growth. When fuel prices tumble this hard, markets are betting on a slowdown. The last time diesel saw such a monthly decline was during the Asian crisis which triggered the collapse of Long-Term Capital Management and roiled global markets.
Are we in for a rerun? The parallels are uncomfortable. The FTSE 100, with its heavy weighting of commodity stocks, has already taken a hit.
Shell and BP have seen their share prices dip. For the Chancellor, the windfall tax on oil and gas producers now looks like a diminishing asset. The Treasury will have to recalibrate its revenue expectations.
For the Bank of England, the dive in fuel prices will drag the headline inflation figure lower. That could give the Monetary Policy Committee room to consider rate cuts sooner rather than later. But the core inflation story remains sticky.
Services inflation, driven by wages, is proving stubborn. The market is now pricing in a first rate cut for August, but I suspect the hawks will still have their day. Capital flight towards government bonds?
Gilt yields have fallen sharply as recession fears intensify. The 10-year yield is now below 4%, a level we have not seen since last summer. This is a vote of no confidence in the growth outlook.
Fiscal responsibility? The public finances have enjoyed a surprising resilience, but if the economy contracts, the deficit will widen. The current chancellor’s headroom will vanish.
We must watch the Autumn Statement closely. For the moment, however, enjoy the lower fuel prices. Fill your tank and your tankard.
But keep one eye on the global horizon. The clouds are gathering.
