British inflation hits three-year peak

18th October 2011, Comments 0 comments

British annual inflation struck a three-year peak in September due to surging household energy bills, according to data published on Tuesday which added to the gloomy economic backdrop.

Consumer Prices Index (CPI) annual inflation raced to 5.2 percent last month, compared with a level of 4.5 percent in August, the Office for National Statistics (ONS) said.

The figure overshot market expectations for a jump to 4.9 percent, according to analysts polled by Dow Jones Newswires, and comes amid deep concern over the fragile British economy which flatlined in the nine months to June.

"By far the largest upward pressure to the change in CPI annual inflation between August and September came from increases in gas and electricity charges," the ONS said.

"There were also large upward pressures from air transport and communication services."

The retail prices index (RPI) inflation rate, which includes home loan costs, jumped from 5.2 percent in August to 5.6 percent in September -- which was the highest rate since June 1991.

Bank of England chief Mervyn King sought to reassure business leaders later Tuesday, telling them that inflation "should fall back sharply early next year", and blamed the figures on temporary spikes in energy and import prices.

The dire news came one day after British Prime Minister David Cameron held a summit with energy companies, consumer groups and regulators to agree various measures aimed at cutting domestic electricity and gas bills.

But the ONS revealed that household gas prices had jumped by 13 percent last month, while gas prices leapt by 7.5 percent.

Food added 6.4 percent and transport prices gained 8.9 percent. Communication costs, driven by mobile phone charges, increased by 5.9 percent.

Analysts warned that annual inflation may rise even further before the end of 2011 -- but should fall back sharply next year as a global economic slowdown weighs on energy demand and prices.

The Bank of England has consistently warned that CPI inflation would spike above 5.0 percent this year -- due to high energy costs and the government's sales tax hike back in January -- before falling back in 2012.

The ONS added Tuesday that the latest Consumer Prices Index inflation figure was the highest since September 2008, when it had also hit 5.2 percent.

That was a record for the CPI inflation measure that was only introduced in 1997. Britain was hit by double-digit inflation in the early 1990s under a separate measure.

The Bank of England's main task is to use monetary policy to try and keep annual inflation close to a 2.0-percent target level.

However, the central bank is increasingly worried about the economy sliding back into recession, according to analysts.

"We do not currently expect CPI inflation to return to the 2.0-percent target in 2012 but, with the economy close to recession and the severe euro area crisis, the UK economy faces much bigger threats than the issue of whether inflation next year is 2.0-3.0 percent," said Citi economist Michael Saunders.

"We expect the (Bank of England) will continue to lean in favour of extra stimulus until growth prospects improve materially."

The BoE decided earlier this month to inject another £75 billion (86 billion euros, $115 billion) of new money into the economy to help support growth.

Jonathan Loynes, chief European economist at Capital Economics research group, described September's spike in inflation as a "nasty surprise".

He added: "The key point is that inflation is either at or close to a peak and should soon start to fall back quite sharply."

© 2011 AFP

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