Inflation set to reach 5% within weeks

Published on 09/08/2008 19:19

INFLATION is tipped to surge beyond 4% this week amid mounting fears that the recent sharp rises in utility bills could push it as high as 5% by September.

Economists are expecting the Consumer Prices Index (CPI) to hit 4.2% when the latest figures are unveiled on Tuesday, up from June's worse-than-expected figure of 3.8%.

Although oil prices have slowed substantially since reaching an all-time high of $147 a barrel on July 11, closing at $115 on Friday, economists say the changes will not affect inflationary figures until next month, by which time the recent dramatic leaps in consumer energy prices are likely to push the CPI higher.

Last week Scottish Gas owner Centrica raised energy bills for some customers by as much as 44% following a similar move by the French energy giant EDF, which increased prices for its five million UK customers by 22% for gas and 17% for electricity. Other energy companies including ScottishPower are expected to follow suit with "double-digit" rises in the coming days.

Sebastian Mackay, a senior economist at Scottish Widows Investment Partnership, said the rises in household bills could push the CPI up to a peak of 5% in September, a full three percentage points above the Bank of England's 2% target.

"It's really from August that the fall in petrol prices will start to come through, but by then you will feel the impact of increased utility bills.

"We are expecting it to peak in September. It could hit 5%. It really depends on how much the fall in petrol prices offsets the increases in utility bills," he said.

Tuesday's CPI announcement will increase the already substantial pressure on Bank of England governor Mervyn King, who is scheduled to release the Bank's latest quarterly inflationary report on Wednesday.

According to Keith Bowman of Hargreaves Lansdown stockbrokers, the report will make for interesting reading as the Bank had previously forecast inflation to reach 3.6% in the third quarter of this year, which the CPI has already exceeded.

Bowman said: "The previous report, issued in May, saw the Bank outlining its forecast for annual CPI to hit the 3.6% mark come the third quarter, a figure which it has already surpassed.

"However, the Bank may well point to the recent decline in the price of crude oil as helping to curtail inflation prospects going forward, allowing the Bank to maybe suggest that the current global economic downturn will eventually rein in elevated inflationary pressures."

Some economists are hopeful that as long as oil prices remain under control, inflation could ease off towards the end of the year, allowing King and his Monetary Policy Committee more room for manoeuvre on interest rates.

Hetal Mehta, a senior economic adviser to Ernst & Young's Item Club, said: "With the significant drop in the oil price over the past few weeks, combined with an easing of inflationary pressures as spare capacity in the economy increases, the Bank of England could cut rates as early as November."