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Incomes likely to fall again in 2012

Rising oil and commodity prices threaten inflation and could further dent consumer incomes, report w

UK consumers could face a third year of falling disposable incomes, the Centre for Economics and Business Research (CEBR) has warned.

CEBR's latest Consumer Insights report points to rising oil and commodity prices as the cause of the expected squeeze on British households this year. These rising costs threaten UK inflation and will directly impact the spending reach of consumer income.

The thinktank previously forecast a fall in inflation to 1.8 per cent by 2012 Q4. However, with the oil and commodity price increase -- tied to the political uncertainty in the Middle East and the effects of global quantitative easing -- inflation could instead reach 2.5 per cent by the final quarter of 2012. CEBR's last report forecast that real incomes would rise this year.

The fall in real household disposable income is forecast at 1.1 per cent in 2012 and 1 per cent in 2013; equating to an average household income 5.7 per cent lower next year than it was in 2007. Shehan Mohamed, a CEBR economist and author of Consumer Insights said:

The price of oil is currently $35 a barrel higher than when we made our last macro forecasts. If it remains here it will add nearly 0.4 per cent to consumer prices directly and possibly double that if indirect effects are taken into account and would mean that our previous forecast that inflation will fall below the [Bank of England's] 2 per cent target by [the end of] 2012 is most unlikely to happen.

Earlier this month, a HSBC report warned that rising oil prices are a bigger threat to the global economy than Greece, which has repeatedly feared defaulting on its sovereign debt. Stephen King, chief economist at HSBC said:

With Greece disappearing, at least temporarily, from the headlines, investors have quickly found a new source of anxiety thanks to the recent surge in oil prices.If the trend persists, a fragile economic recovery in the developed world could quickly be derailed and inflation could return to emerging markets.

Alice Gribbin is a Teaching-Writing Fellow at the Iowa Writers' Workshop. She was formerly the editorial assistant at the New Statesman.