Oil fuels rise in living costs

Skyrocketing oil prices are expected to cost household budgets an extra 800 million euros this year, at a time when higher-than-expected inflation has helped to depreciate the average income by -170. In 2007, the higher oil prices cost -1.1 billion. Uncertainty over the US economy and inflation fears have forced investors toward the safe haven of commodities, which has in turn seen prices soaring. Oil prices moving beyond the $110/barrel mark have already had an impact on retail energy prices in Greece, up 20 percent in the past 12 months, according to the Organization for Economic Cooperation and Development (OECD). A special OECD study on the impact of the price of oil on inflation and demand in Europe, the USA and Japan shows that a 10 percent increase augments eurozone inflation by 0.14 percentage points. The Bank of Greece estimates that the impact in this country is even higher, at 0.19 percent, owing to the country’s increased dependency on energy. This brings the overall increase in the inflation rate in Greece in 2007 to 0.65 percent, seriously affecting consumer purchasing power. The mean gross annual income in 2007 stood at -26,900, and income depreciation because of higher inflation is estimated at nearly -170. An increase in oil prices has a negative impact also on growth rates and, naturally, on income per capita, translating into an additional burden of -700 million. Similarly, a growth slowdown impacts employment and, in turn, available income. The European Central Bank (ECB) projects that the average oil price this year would be $90.6 per barrel, an increase of 13 percent year-on-year. At the same time, the euro is projected to gain ground against the dollar by approximately 3.0 percent. This would push both inflation and growth up by 0.4 percent, costing approximately -800 million. In February 2008, inflation hit its highest level of 4.4 percent since January 2002. But things are even worse when one considers that the ECB has projected higher oil prices will push up food and non-energy commodities, estimated to rise by 13 percent. The euro’s race against the dollar, according to Morgan Stanley, is having a serious effect on eurozone growth. Estimates show that a 10 percent increase in the euro’s weighted parity will contribute to slowing growth by 0.2-0.3 percent in about a year’s time. This means that Greece is this year to face the consequences of the euro’s 2007 race against the dollar. The OECD estimates show that each 10 percent increase in oil prices augments inflation in the eurozone by 0.14 percent, in the USA by 0.23 percent and in Japan by 0.08 percent. Similarly, an increase in oil prices by $15 is having a slowing effect on growth by 0.50 percent in the USA, 0.60 percent in Japan and 0.40 percent in Europe. However, the range of the impact is also influenced by foreign exchange parities and interest rates. LEONIDAS STERGIOU

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