Belts tighten even further as clothes and food bills soar

Official figures show that clothing rose by its biggest increase on record in August, while the price of gas, electricity, water and housing rocketed by 5.1 per cent – the highest annual increase since July 2009.

Unlike during many previous rounds of high inflation, average wages are now not keeping pace with the rocketing cost of living.

And the pressure on prices shows no sign of abating. Five of the “Big Six” energy suppliers have recently hiked their bills, with two increases due to come into effect later this month and a third on 1 October.

Furniture, household equipment and maintenance were also up by the largest amount on record, according to the figures released by the Office for National Statistics (ONS) – 5.8 per cent year-on-year – while the cost of services at restaurants and hotels soared by 4.6 per cent. Alcohol and tobacco rose by almost 10 per cent – while the only category to note a drop was recreation and culture, which fell by 0.8 per cent.

The headline inflation figure, calculated with the basket of goods chosen by the ONS to represent the Consumer Price Index (CPI), is still well above the Bank of England’s target of 2 per cent and is at its joint highest level in three years with last April and May. BoE governor Mervyn King will have to write to explain the situation to Chancellor George Osborne for the 21st consecutive month.

“Those increases represent another shock to households’ disposable incomes, which will put consumer spending under more pressure in the third and fourth quarter of 2011,” said David Tinsley, economist at BNP Paribas.

Recent economic data has suggested the Britain’s economy has hardly grown at all in recent months, while a weakening global economic outlook threatens to tip the UK back into recession.

Savers will also be hard hit – as the majority of banks’ interest rates are well below the level of inflation, meaning money is actually decreasing in value while it sits in a savings account.

“Currently, no savings accounts pay enough to offset the damage done by inflation,” said Kevin Mountford, head of banking at Moneysupermarket.com.

The BoE expects inflation to fall below target to around 1.8 per cent in two years’ time, particularly as this year’s VAT increase falls out of the calculation.

“The glimmer of optimism, albeit deferred, is that at some point in the winter, we could see the inflation rate begin to drop again towards the 2 per cent mark which is the Bank of England’s target,” said PwC economist Esmond Birnie.

“We fully expect inflation to increase this autumn before falling back next year and this latest rise in inflation must be seen in that context,” added Liz Cameron, chief executive of the Scottish Chambers of Commerce, adding that the BoE should keep interest rates at the current record low of 0.5 per cent to give businesses a boost.

“Energy costs continue to be a significant factor in terms of inflation and recently announced price rises will begin to bite in October.

“Coupled with the continuing effect of the VAT rise on the figures, this all backs up the Bank of England’s assessment that inflation is a temporary problem.”

Economists claimed the rate of inflation is likely to peak at about 5 per cent this autumn before falling back to below target.

Jonathan Loynes, chief European economist at Capital Economics, said: “After that, though, food and energy effects should start to fade quite fast, while core inflation – which held at 3.1 per cent in August – should fall as VAT and sterling effects fall out and the weakness of consumer spending bears down on retailers’ margins. Accordingly, we still expect inflation to be well below its 2 per cent target at the end of next year.”

The case for more quantitative easing – pumping more cash into the economy to stimulate activity – was bolstered by the disappointing trade figures.

While exports grew in the month, they were overshadowed by stronger growth in imports.

Furthermore, analysts warned that weakened global growth, particularly the slowdown in the eurozone, did not bode well for UK exports in the near term.

“It is clear that if the central bank does act anytime soon, it will be to try to stimulate economic activity through more quantitative easing,” said Howard Archer, chief UK economist at IHS Global Insight.

The Retail Price Index (RPI) measure of inflation, which includes housing costs such as mortgage payments and council tax, rose to 5.3 per cent in August, up from 5 per cent in July.

Mr Archer added: “While the rise back up in consumer price inflation to 4.5 per cent in August is hardly pleasant news, it is fully in line with expectations and does not materially change the monetary policy outlook.”