Energy price hikes push inflation to new record

Published on Tuesday 14 October 2008 11:19

Inflation soared to a new record in September after gas and electricity price hikes, official figures showed today.

The Consumer Prices Index (CPI) reached 5.2% last month – the highest CPI reading since 1997 and a 16-year historical inflation peak.

But the Government also faces paying out billions more in benefits and pensions after the headline Retail Prices Index (RPI) reached 5%.

September's RPI – which was last higher in July 1991 – is commonly used by the Government to calculate pension increases for the coming year.

Pensions usually increase by 2.5% or headline RPI, whichever is higher.

The headline RPI, less costs such as rent, council tax and mortgage interest payments, is also used to calculate increases in benefits such as Jobseeker's Allowance and income support under the Rossi Index.

Today's CPI figures are likely to mark an inflation peak as policymakers on the Bank of England's Monetary Policy Committee (MPC) – who cut rates by 0.5% last week – turn their attention towards avoiding a severe recession following the current financial turmoil.

But the data will also serve as warning of a residual inflation threat for MPC, which did not have access to the figures before cutting rates last Wednesday.

Following the price hikes for gas and electricity – and an earlier round of increases in January – electricity prices are up 30.3% year on year, with gas costs up almost 50%.

The annual rate of inflation for energy and other household bills reached 15% – the highest since 1989, while price rises for clothing, footwear, toys and games added to the pressure.

But there was some better news for inflation watchers as food inflation slowed for the first time since March, largely due to unchanged milk prices last month compared with a 4p rise a year earlier. Meat prices however continued to rise, with bacon almost 20% dearer than a year earlier.

As crude oil prices fall, the average price of petrol also fell by an average 1.7p a litre between August and September, compared with a smaller decline a year earlier.