Inflation jump threatens recovery

October's hike in CPI to 2.7 per cent squeezes incomes and reduces Bank's policy leeway

November's unexpectedly large spike in inflation threatens to undermine the recovery and tie the hands of the Bank of England to do anything about it, analysts warned yesterday.

The Office for National Statistics (ONS) reported that the consumer prices index of annual inflation rose to 2.7 per cent last month, up from 2.2 per cent in September, breaking a three-month run of declines in the cost of living.

The majority of the rise was a consequence of the Coalition's decision to raise the cap in university fees, which took effect this autumn. The costs of education services rose by 19.1 per cent as a result. Analysts knew that higher tuition fees, which rose from a maximum of £3,375 to £9,000, would be reflected in the cost of living this month, but the consensus was that the annual inflation rate would come in at only 2.4 per cent.

The ONS also reported contributions to the increase in the rate from clothing and footwear as well as food and drink prices.

Core inflation, which strips out one-off items, rose from 2.1 per cent to 2.6 per cent. And higher energy prices, following tariff hikes by several largest electricity firms, are also set to feed through to the index in coming months, which could push inflation above 3 per cent.

Most forecasters' expectations of growth in 2013 are based on the assumption of an end to the squeeze on household incomes, resulting from lower inflation. But if prices remain high, these calculations will be compromised.

"With wage growth still around 2 per cent per year, inflation is outpacing it. This reduces real incomes and means the hard-pressed consumer is less likely to drive a recovery by increasing spending," said Simon Wells, economist at HSBC.

Analysts also said that higher prices would restrict the ability for the Bank of England's Monetary Policy Committee to increase monetary stimulus.

"Barring a major downside economic risk, the profile of rising inflation looks set to dissuade members from backing more asset purchases for the foreseeable future," said Philip Shaw of Investec.

The Bank of England will today release its latest Inflation Report, which is expected to show a higher profile of inflation than it laid out three months ago. But some analysts said there is good reason to believe inflation, which peaked at 5.2 per cent in September 2011, will continue its downward trend after passing this latest hump.

"Price pressures at the start of the inflation pipeline remain fairly weak. Output prices rose by just 0.1 per cent on the previous month in October. We still think that the weakness of economic activity will bring inflation down again in time, potentially to a very low rate," said Samuel Tombs of Capital Economics.

The Government described the figures as "disappointing" but stressed it has acted to relieve the squeeze on living standards.

"The Government has taken action to help people with the cost of living, including freezing fuel duty and council tax and taking two million people out of income tax altogether," a Treasury spokesperson said.

But Labour accused the Government of being responsible for the rise.

The shadow Treasury minister Catherine McKinnell said:"Instead of easing the squeeze, the Government is adding to the cost of living crisis for people on low and middle incomes.

"Conservative and Lib Dem MPs last night voted against Labour's call for January's 3p fuel duty rise to be postponed. And in the coming months millions of families and pensioners on low and middle incomes face rising energy bills, cuts to child benefit and the granny tax, while 8,000 millionaires get a tax cut."

Inflation peaked at 5.2 per cent in September 2011.