Inflation dips but prices are tipped to rise again soon

Published on Tuesday 13 October 2009 21:24

PRICES will be on the rise again by Christmas, analysts predicted yesterday, as it was announced that inflation fell last month to its lowest annual rate in five years, further denting the value of the pound.

Official figures showed the key Consumer Prices Index (CPI) measure of inflation dropped to an annual rate of 1.1 per cent in September from 1.6 per cent. The measure was last at this level in September 2004.

Most analysts had been forecasting a fall to 1.3 per cent. The bigger-than-expected slide was largely attributed to unchanged gas and electricity prices, compared with big rises in September 2008.

Meanwhile, the wider Retail Prices Index (RPI) measure, which includes house prices and mortgage interest payments, also lost ground in September, falling to -1.4 per cent, compared with a 1.3 per cent decline in August. Economists said the latest figures probably marked a trough and price pressures would start rising again over the next few months.

The pound fell to a fresh six-month low against the euro – just over 1.06 – and gilts charged upwards as dealers bet that the Bank of England could take further measures to boost growth.

UBS economist Amit Kara said: "To the extent that the inflation data has surprised on the downside, I think it will provide something of a comfort to the monetary policy committee (of the Bank of England].

"I think it's minded to expand the quantitative easing programme. This just provides the additional reason to do it."

Other economists pointed to background price pressures and said there was now less chance of the central bank Governor, Mervyn King being forced to write a letter to the Chancellor if CPI undershoots the Bank's 2 per cent target by more than 1 per cent.

James Knightley, an economist at ING, said: "This is only a temporary move lower. Clothing prices and petrol prices jumped, and we suspect that these components have further to rise."

A planned rise in VAT to take effect on 1 January is likely to propel inflation higher early next year, as would rising oil prices and the weaker pound.

Petrol prices were already exerting an upward impact on inflation in September, yesterday's figures showed, as was the cost of second-hand cars.

In contrast, food inflation was -0.9 per cent between August and September, its largest decline across those two months since 2006.

However, the head of Tesco, Britain's biggest retailer, said he was not anticipating deflation becoming a major characteristic of the grocery industry.

Speaking at a conference yesterday, Tesco chief executive Sir Terry Leahy said: "There are probably more forces for inflation in our industry… than deflation."

Commenting on yesterday's inflation data, David Kern, chief economist at the British Chambers of Commerce, reiterated his call for the Bank of England to extend its quantitative easing programme from 175 billion to 200bn.

He added: "Although the stock market is buoyant and the housing market is improving, the tentative signs of UK recovery remain very fragile."