Commentary: The oil shock will not stop at the petrol pump

“Whether this becomes another cost-of-living squeeze depends less on how high oil and natural gas prices rise than on how long they remain elevated and whether the shock spreads through the wider economy.

“The petrol pump is, in some ways, the least interesting part of the story. Crude oil is the largest component in a litre of fuel, but fixed fuel duty and VAT mean pump prices do not move one-for-one with the price of a barrel.

“The greater damage is happening downstream. European refining capacity is unusually tight because of closures, low stocks and reduced access to Russian output. This helps explain why diesel prices have risen more sharply than petrol. Diesel powers freight, so its price matters far beyond the forecourt.

“Oil is not only what we put in our cars. It transports food to shops and is used to produce fertiliser and packaging. Airlines feel higher prices quickly because fuel represents a substantial share of their costs and hedging only buys time. Hauliers and supermarkets may initially absorb higher costs, but eventually renegotiate and pass them on.

“Households therefore notice the effects at the pump within weeks, then on supermarket shelves and in travel costs months later. Low European natural gas stocks could also feed into higher electricity and heating costs this winter.

“CPI was 2.6% in June, and the Bank had expected to be sitting close to 2% by now. An energy shock alone may be temporary, but it becomes a more persistent inflation problem if workers seek higher wages to compensate and businesses raise other prices in response.

“This is why the Bank of England is proceeding cautiously. An oil shock cuts both ways: it raises prices while weakening demand. Waiting may appear the safest option now, but households could pay the price this winter.”