Inflation soars to 16-year high

LONDON (Reuters) - Inflation hit a 16-year high of 5.2 percent in September, but that is likely to be the peak and interest rates are still expected to come down sharply over the next few months in order to prevent a deep recession.

The Office for National Statistics said on Tuesday rocketing utility bills pushed inflation higher by half a percentage point in September to way more than double the central bank’s 2 percent target. Analysts had predicted a rise to 5 percent.

Bank of England policymakers had already factored in the latest jump when they cut interest rates by half a percentage point last week in an emergency move last week to shore up the economy in the face of a global financial crisis.

They are worried the economic outlook has got a lot worse over the last month and two separate surveys on Tuesday showed house prices falling faster in September and retail sales posting an annual fall for a fourth straight month.

Analysts expect interest rates to come down from their current 4.5 percent very, especially as lower oil prices should mean inflation will fall sharply.

“September’s figure will be the peak in inflation and the key issue now is just how far it will drop back as the food and energy effects which have pushed it up so sharply finally fade or go into reverse,” said Jonathan Loynes, chief European economist at Capital Economics.

“Needless to say, steep falls in inflation will help to restore households’ spending power and allow the Monetary Policy Committee to cut interest rates very sharply. We continue to expect rates to drop to 2.5 percent or less.”


The British economy already ground to a halt in the second quarter even before the cataclysmic events in financial markets of the last month sent consumer confidence plummeting and sparked widespread talk of recession around the world.

Like-for-like retail sales fell 1.5 percent on the year in September, according to the British Retail Consortium, as furniture store sales recorded their worst performance in eight years.

And homewares are unlikely to do any better anytime soon as another survey by the Royal Institution of Chartered Surveyors showed the decline in house prices accelerating and sales at a record low as the credit crunch has hit the market hard.

The ONS said the chief driver of the spike in inflation came from gas and electricity bills. Electricity prices were 30.3 percent higher on the year and gas prices were 49.9 percent higher.

However, food inflation, another key source of price pressure this year, eased to 12.7 percent from 14.5 percent as the cost of dairy products fell.

But meat prices, especially bacon, continued to rise and were 19.1 percent higher in September than a year ago. The chief driver of inflation.

Economists calculate that falling petrol prices could easily lop off a full percentage point off the inflation rate in the coming months.

MPC member David Blanchflower, who has been calling for interest rate cuts for months, has even warned that inflation could even fall below 1 percent.

For now, however, the RPI measure of inflation, often used in wage bargaining, rose to 5 percent, up from 4.8 percent in August.

While this could still put upward pressure on wage demands, rising unemployment is expected to keep a lid on pay.

The Rossi index, on which many benefits payment rises are based, is also calculated in September and showed a rise of 6.3 percent on the year.