Inflation soars to 16-year high … but prices set to fall

Published on Tuesday 14 October 2008 22:13

INFLATION hit a 16-year high in September, but the year-long upward spiral in the cost of living could soon be over, experts believe.

Economists said the Consumer Prices Index (CPI), which hit 5.2 per cent last month because of soaring gas and electricity bills, would decline rapidly as the economy slows.

September's CPI was the highest since the benchmark was introduced in 1997 and the biggest since March 1992 by historic data. A year ago it stood at 1.8 per cent.

After energy price rises – and an earlier round of increases in January – electricity prices are up 30.3 per cent and gas costs up almost 50 per cent year on year.

Howard Archer, the chief UK and European economist at Global Insight, said CPI was "almost certainly now at its peak, or very near to it".

"Very weak economic activity, rising unemployment and extended tight credit conditions will increasingly dilute underlying inflationary pressures," he said.

The government also faces paying out billions more in benefits and pensions after the headline Retail Prices Index (RPI) reached 5 per cent. September's RPI – which was last higher in July 1991 – is used by the government to calculate pension increases for the coming year.

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

A 5 per cent rise in the 47 billion cost of the state pension could add more than 2 billion to government costs.

The Bank of England's Monetary Policy Committee, which cut rates by 0.5 per cent last week – is now focused on avoiding a recession, rather than inflation.

The cost of living is more than double the Bank's 2 per cent target, but will fall back sharply as the UK economy weakens.

This left some economists warning of inflation undershooting the 2 per cent target as oil and food prices drop back and businesses lower their prices to attract customers as the economy slows.