Inflation soars

14 Oct, 2008

Consumer price inflation hit a 16-year high of 5.2 percent in September, but Bank of England policymakers had anticipated the rise which is unlikely to stand in the way of further interest rate cuts. The Office for National Statistics said on Tuesday rocketing utilities bills pushed consumer prices 5.2 percent higher on the year compared with a rise of 4.7 percent in August. Analysts had predicted a 5 percent rate. The Bank said last week when it cut interest rates by 50 basis points to 4.5 percent that although inflation could soon spike above 5 percent, financial market turmoil had increased the downside risks to the economy and prices. Many economists are predicting sharp interest rate cuts in the coming months to stave off a deep recession and policymakers are worried the outlook for the economy has worsened markedly in the last month. “We see this as the peak in inflation and retreats in energy prices should see inflation fall back relatively sharply over the next year,” said David Page, an economist at Investec. However, interest rate futures fell slightly after the stronger than expected reading. The RPI measure of inflation, often used in wage bargaining, rose to 5 percent, up from 4.8 percent in August. While this could still put upward pressure on wage demands, rising unemployment is expected to keep a lid on pay. The ONS said the chief driver of the spike in inflation came from gas and electricity bills. Electricity prices were 30.3 percent higher on the year and gas prices were 49.9 percent higher. However, food inflation, another key source of price pressure this year, eased to 12.7 percent from 14.5 percent as the cost of dairy products fell. But meat prices, especially bacon, continued to rise and were 19.1 percent higher in September than a year ago.

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