Inflation Nears Three Year Low

Tuesday, 16th October, 2012

The headline rate of inflation has eased to a near three year low of 2.2% in a welcome development for household budgets but not for people claiming benefits or the state pension.

The figure was flattered by sharp rises in gas and electricity prices a year earlier falling out of the calculations but experts warn the latest round of energy bill increases will force the Consumer Prices Index (CPI) measure higher in the coming months.

September’s CPI figure, which is the lowest since November 2009, is traditionally used by the Treasury to determine next April’s increases in the state pension and benefits.

Such claimants did well last Sepember when CPI stood to 5.2% so the latest number signals a far weaker rise to benefit cheques next year.

But experts expect price pressure on consumers to grow again with food costs starting to rise following poor harvests as a result of drought and floods.

Customers of British Gas, Scottish Power, Npower and SSE will also be paying more for their household bills this winter.

EDF Energy and E.On are the only two suppliers within the so-called ‘big six’ yet to confirm their plans.

Howard Archer, chief economist at IHS Global Insight, agreed the September inflation figures could mark the trough in recent falls.

He said: “Consumer price inflation could well be pushed back above 2.5% by the move back up in petrol prices, some utility bills rising in October and November and likely higher food prices.”

Philip Shaw, chief economist at Investec Securities, warned CPI would hit 3% by mid-2013.

He said: “A near tripling in university tuition fees should push CPI inflation up in October, with further food and energy price increases likely to add to that rising trend.”

A rising inflation outlook could hold policymakers back from launching more quantitative easing (QE).

Many economists believe the Bank of England will pump more cash into the economy in November but rising price pressures may dampen QE expectations.

Three of the nine rate-setters on the Monetary Policy Committee (MPC) have voiced concern over the inflation outlook.

A return to economic growth in the third quarter of the year, meaning the UK would exit recession, could also weigh on the minds of those on the MPC.