Inflation reached 16-year high of 5.2% in September

Price rises set to fall back as recession looms
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The Independent Online

Inflation reached a 16-year high of 5.2 per cent in September, official statistics have revealed, though economists said they believed price rises have now reached a peak.

The size of the jump in consumer price inflation (CPI), up from an annual rate of 4.7 per cent in August, exceeded City expectations. Almost all of the increase – 0.4 percentage points of the 0.5 percentage points surge – was due to higher gas and electricity bills, though petrol was cheaper, as was food.

The annual rate of household fuel inflation hit 39.6 per cent last month, and is now higher than any time since at least 1975. Gas prices are up almost 50 per cent on this time in 2007.

Nevertheless, economists believe the headline rates of inflation are now set to fall back, with oil prices having plunged to almost half since the $147 a barrel mark seen in July, the near certainty of a recession later this year or early next, and the financial turmoil of recent weeks.

"This is very much yesterday's news, in our view," said Matthew Sharratt, UK economist at Bank of America. "While some of the lagged effects on costs from the previous surge in commodity prices have still to feed their way through, we believe the peak in inflation is behind us. More importantly, the economy is likely to fall into recession, with the unemployment rate likely rising to 7 per cent by the end of next year pushing up unemployment to around 2.2 million."

The high rate of inflation, more than two-and-a-half times the Government's official target of 2 per cent, would in the past have prompted calls for interest rate rises. However, such is the anxiety about the recession the credit crisis could prompt that the Bank of England cut rates by 0.5 percentage points last week. Most City economists forecast another 0.25 percentage point cut next month, with rates coming down to between 2 and 3 per cent by the end of 2009.

Price rises in some areas of the economy are already slowing. A decline in food costs had the biggest downward effect last month; inflation would have been around 5.4 per cent without some marked falls in milk and fruit prices. Annual food price inflation has eased from a multi-decade high of 14.5 per cent reached in August, to 12.8 per cent last month.

"Core" or underlying inflation, excluding volatile items such as food and fuel, rose from 2 per cent to 2.2 per cent, with most observers confident that this does not signal an "embedded" trend towards higher long-term inflation.

Nevertheless, the poorest and the elderly are continuing to be hard hit by steep rises for essentials. The independent Institute for Fiscal Studies said that, for households in the poorest fifth of the population, those aged over 65 had an average inflation rate of 9.4 per cent; at the other end of the scale, households aged under 35 in the richest segment had average inflation of just 4.4 per cent.

The older Retail Price Index measure of inflation, which includes some element of housing costs, was also up last month, to 5 per cent from 4.8 per cent in August. This is the measure used to uprate many state benefits, including pensions. The IFS said: "The Government may now find itself spending around £3bn more next year on benefits than it thought at the time of the Budget, when it forecast RPI inflation for September of just 3.25 per cent."

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