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How accelerating car costs put the brakes on motorists

Economy Watch by Richard Ramsey, Ulster Bank chief economist

Published 17/05/2016

Ulster Bank chief economist Richard Ramsey
Ulster Bank chief economist Richard Ramsey

It probably hasn't been a great year for Jeremy Clarkson. But can the same be said for petrol heads as a whole? While consumers in general have been benefiting from falling food, clothing and energy prices, what has been happening to fuel, car, and auto part costs? With the hotly anticipated new BBC series of Top Gear set to get underway with new presenters, I thought it would be worth taking a peek under the bonnet.

What becomes clear is that whilst headline inflation - calculated using a basket of around 700 consumer goods and services ranging from tracksuit bottoms to a haircut - is low, there are vast differences between the inflation rates of the various items within. For example, consumer goods fell last year by 2% while the price of consumer services rose by 2.4%.

Using the Office for National Statistics (ONS) Consumer Price Index (CPI) data, we have devised our own measure of motoring-related goods, services and expenditures - the Petrol Heads Index (PHI). This includes windscreen wiper blades, brake pads, car batteries, tyres, car bulbs, MoT fees, car repairs, motor insurance, fuel prices, new and second hand car prices, and more. Some of these prices have been moving in opposite directions.

So, how have motorists fared overall? Following the UK recession, the PHI jumped by over 17% between 2009 and its peak in 2012 (with a 9% rise in 2010 alone). Soaring fuel costs were the primary reason, triggering a change in motoring behaviour. In England for example, average annual mileage fell by 11% or 1,000 miles, from 8,900 in 2007 to 7,900 in both 2013 and 2014. With pay freezes/cuts widespread over this period, the rev counters of households' budgets were in the red, with motorists applying the brakes to consumer spending.

However, this trend has recently gone into reverse. Falling petrol/diesel prices have contributed to a decline in the PHI, most notably since 2014. Last year the PHI fell by 4% and at quarter one this year fell by another 2%. As a result, the PHI is at its lowest since 2009, though rising fuel costs of late suggest we have passed the trough.

The fall in fuel prices had acted as a tax cut and a much needed fiscal boost. As motorists began refuelling their cars, the decline in prices was helping to refill their disposable incomes and fuelling a recovery in consumer spending.

In 2012, the cost of a litre of petrol and diesel was £1.35 and almost £1.42 respectively. In 2014, prices eased but stayed high at £1.28 and £1.33 a litre. Last month, they averaged £1.06 and £1.07. Incidentally, at the time of Top Gear's studio-based re-launch in 2002, the average price of a litre of petrol and diesel was 73p and 75p.

How significant have these falls been? It is perhaps worth introducing a Top Gear challenge at this point. Driving from John o' Groats to Land's End would have cost £95 of diesel in your Nissan Qashqai in 2014; last month it would have been £19 cheaper at £76.40. Those driving a 'Chelsea Tractor' would save £27 on diesel for their BMW X5 on the 874-mile journey last month relative to 2014. The average motorist drives this distance nine times a year, so scale up the savings accordingly.

All this talk of falling prices has not extended to car repair, maintenance or insurance. Repair and maintenance bills increased by over 2% last year and are 10% higher relative to 2010. They are up 38% in the last decade. The good news is that repair and maintenance costs are rising at less than half the pre-recession long-term average (5.7%).

But 2015 was not a good year for insurance costs either, with transport insurance premiums up over 3% - its steepest annual rise since 2011. But it gets worse. Transport insurance has jumped over 11% in the 12 months to March 2016. Transport insurance premiums have doubled since the recession began in 2008.

What about car loans? Alongside falling fuel prices, motorists taking out personal loans to purchase a car have experienced plummeting interest rates. Last year the average interest rate on a £10k personal loan fell below 5% and averaged 4.4% for the year. This compares with almost 10% in 2010 and a stonking 17% in 1995.

Unfortunately, falling interest rates on car loans have not been accompanied by falling car prices, at least not for new cars. Last year, new car prices in the UK rose 2% (double the rate in 2014), which compares with broadly flat CPI (0.4%). The latest figures in 2016 show annual price rises have slowed to just over 1%. This is still twice the headline rate of CPI. Meanwhile second-hand car prices fell last year at their fastest rate since 2008 (-6%).

Over the last five years new car prices have risen by less than 4%, whereas second hand car prices have fallen by four times this amount. This may appear strange. But the mix of cars falling into this basket of goods has changed. Smaller, cheaper brands have entered the second hand basket.

As Jeremy Clarkson embarks on his new show on Amazon, he will be hoping his career has turned a corner. As for motorists, PHI appears to have turned a corner too, but on to an uphill slope. Declines in PHI are likely to be seen only in the rear view mirror, as the journey though the consumer sweet spot ends. With some warning lights flashing on dashboard, looking ahead prices are more likely to rise than fall.

In next week's Economy Watch, we hear from Danske Bank chief economist Angela McGowan

Belfast Telegraph

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