The Top 10 commodities that affect the household budget – from Kevin Morrison, author of Living in a Material World

1) Oil – the cost of filling up the car has increased. Wholesale oil prices, which is what the refiner pays for the oil before it processes the oil into products such as petrol and diesel, are rising. However, the price of petrol has only increased by about 25%. This is because so much of the petrol price is tax, going straight back to the government. At the moment about  50 pence of the price of a litre of petrol is fuel; on top of that is the VAT, which is charged on the final retail price – so if the retail price £1.25 a litre another 17.5% (21.8 pence) is paid to the government through the VAT.

So if the government cuts its VAT or fuel excise on petrol – so that people with cars can drive more cheaply - it means that it has less revenues to spend on education or hospitals.

2) Gas – the cost of cooking and heating – gas prices are linked to oil prices, so when oil prices go up so do gas prices, hence households will be paying more to cook on the gas stove and to warm their homes from their central heating systems.

3) Electricity – power in the UK largely comes from gas; about 40%, and coal fired power stations; about a third of all power. As already mentioned, gas prices have risen, so have thermal coal prices, which have also doubled in the past year. Plus electricity generators have to pay for the cost of pollution, carbon dioxide, which has also pushed up power prices. Also the fact that Britain wants 10% of their energy coming from renewable energy such as wind, which costs more to generate than gas or coal, means that this move is also raising the cost of producing electricity.

4) Supermarket shopping – the cost of food has risen with basic foodstuffs such as rice, corn, wheat, soyabeans have all risen as much as 100%. The use of corn or maize as it is called in Europe, in the US for biofuels has meant that more of the world’s corn supplies are going to make ethanol to put in a car, rather than feeding animals or make food products.

5) Dairy products have also risen sharply. The reasons for this are many, from droughts in New Zealand, one of the world’s largest dairy producers, contributing to the rise in milk etc.

6) Meat and fish – because corn, wheat and soyabeans are largely used for feeding animals – the cost of feeding an animal has risen and therefore the cattle, pig or chicken farmer has to charge more for the animal, and hence we have to pay more at the supermarket for meat. Same goes for fishermen; one of their biggest costs is fuel and they have seen their fuel costs double, so that means it costs more to fish and so they have to charge more for their catch.

7) Water – the problems of aging Victorian water mains in London have been apparent over the last few years with leaking pipes etc; now water companies are finally spending more on fixing the problem. This is due to the supply of water becoming more of a sensitive issue, as drought warnings in Britain in recent years have increased the focus on water efficiency and eliminating wastage – both these measures come at a cost and hence the consumer has to pay more.

8) Climate change – billions of pounds will have to be spent on measures adapting to climate change such as building more flood defences along the east coast of Britain and a bigger Thames Barrier.  London's existing tidal defences were only designed to provide protection up until 2030, so construction of the new defences will have to start in the near future.

9) Metals – the cost of steel, aluminium, nickel and copper have all risen greatly over the last four years; meaning the cost of building a car, for example, will increase.

10) Building materials for plumbers, electricians and handymen have also risen, hence the cost of some home renovations will also increase.

In summary, the cost of energy, food and raw materials are all at near record highs, largely as a reaction to the fact that there is greater demand for these commodities as there are more people in the world with more money. Much of the creation of new wealth in the 21st century as been in the developing world where, for many, they have been able for the first time in their lives to buy a car, buy more protein rich food, buy electronic goods, and this has put a strain on the supply of raw materials as more people want the things we have taken in the West for granted. This is a change in demand that is more permanent and as a result we will all have to get use to higher prices.
 
There is no place for government to subsidise petrol or energy or even food. Many countries have proved that in the past two months with Pakistan, Indonesia, China and India all cutting the subsidies for fuel and electricity as the rise in prices was making too big a hole in the government budgets. After all, cars are still considered a luxury item to most people in the world; for government to finance the weekly petrol bill of drivers makes mockery of running a government for all. 

For more information on Kevin Morrison and his forthcoming book, Living in a Material World: The Commodity Connection, click here