Inflation rising at fastest rate since 1992
Inflation hit 5.2% in September, up from 4.7% in August and now at its highest rate since March 1992.
The Consumer Price Index (CPI) – the official measure of inflation – has been pushed so far beyond its 2% target largely as a result of higher food and fuel prices. The Office for National Statistics says gas and electricity bills were the main factor on inflation last month, with the former up nearly 50% and the latter up 30%.
The cost of clothes, shoes and leisure activities also prompted inflation to surge upwards, as did the cost of meat – particularly bacon. The Retail Price Index - which includes mortgage repayments - hit 5% in September.
The Bank of England’s Monetary Policy Committee – which helps control inflation through interest rates – has repeatedly warned that CPI would rise above the 5% this year. However, governor Mervyn King has predicted it will peak at this level before falling back down towards its 2% target in 2009.
Economists at Capital Economics agree that inflation appears to have peaked. However, how quickly it falls remains to be seen.
Jonathan Loynes, chief European economist at Capital Economics, says: “The key issue now is just how far and fast it will drop back as the food and energy effects which have pushed it up so sharply over the last year finally fade or go into reverse.”
He adds that, provided wholesale oil prices continue to fall, inflation should return to below 4% by the end of this year.
“By the Autumn, we expect it to have fallen to 1% but it could go lower – and even turn negative – if oil prices fall much further,” Loynes warns.
The Retail Price Index is likely to fall even further as a result of the housing market downturn.
Richard Snook, senior economist at the Centre for Economic Business Research, says interest rates still need to fall back further despite inflation now standing at over 5%.
"The Bank of England should deliver a further 50 basis point reduction to take interest rates down to 4% this year. This would be the correct move in terms of boosting confidence in financial markets - this would also be the correct move for inflation in the medium term."
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).