UPDATE 1-UK inflation nears 3-year low before energy bills rise

Tue Oct 16, 2012 5:39am EDT

By Olesya Dmitracova and Peter Griffiths

LONDON Oct 16 (Reuters) - British inflation fell to its lowest in almost three years in September, although the relief for consumers and policymakers may be temporary as energy bills are set to climb.

The fall may give the Bank of England leeway to add to its programme of asset buying when the current 50 billion pound ($80 billion) round is completed next month.

The Office for National Statistics said on Tuesday that annual consumer price inflation slowed to 2.2 percent last month, as forecast. It was the slowest pace of increase since November 2009 and followed August's 2.5 percent.

But inflation remains above the Bank of England's 2 percent target, even before hefty price rises recently announced by four of Britain's biggest energy suppliers kick in.

"This is as low as the inflation data is going to go. This is the best chance we had to hit the 2 percent inflation target, and we failed," said Alan Clarke, economist at Scotiabank.

"But the tide has now turned and utility price hikes will push (it) up. Tuition fee increases will likely also have an effect," he said, adding that he expected the central bank to hold back from injecting more cash into the struggling economy.

The BoE and the government have been hoping that falling inflation will ease the squeeze on Britons' budgets and allow them to spend more, helping support the economy.

"The rate of inflation has now more than halved since its peak last September, bringing welcome relief to the budgets of families and businesses," a finance ministry spokesman said.

The September inflation figures are usually used to adjust benefit payments, with the lower inflation rate providing some respite for the cash-strapped government.

Last month's reading was lower due largely to the fact that sharp rises in prices for gas and electricity had driven inflation to a peak of 5.2 percent in September 2011.

Britons see climbing energy prices as the biggest threat to their standard of living over the coming year, according to a YouGov survey published on Monday.

Higher inflation would also undo some of the improvement in Britons' real disposable income, which posted the sharpest quarterly increase in three years in the second quarter.

MORE QE?

For now, the drop in inflation means the BoE could extend its quantitative easing asset purchases in November, although three of the nine rate-setters have voiced concern over the inflation outlook.

Most economists still expect another dose of stimulus, although some doubt has crept in due to mounting signs that the economy grew between July and September, following three straight quarters of contraction.

Separate ONS data showed that factory gate inflation sped up to 2.5 percent on the year versus economists' forecasts for 2.2 percent, pointing to rising pipeline price pressures.

Input prices fell 1.2 percent on the year versus forecasts for a 0.8 percent drop, with the biggest pressure coming from falling costs of imported metals and crude oil.

Retail price inflation - used to calculate returns on index-linked British government bonds - dropped to 2.6 percent last month from 2.9 percent in August.

The ONS also said that house prices rose 1.8 percent on the year in August, down from a 2 percent increase in July.