Inflation rising at fastest rate since 1992

14 October 2008

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." 

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