Inflation soars to 16-year high in Sept

By Sumeet Desai and Matt Falloon

LONDON (Reuters) - Inflation hit a 16-year high of 5.2 percent in September, but that is likely to be the peak and interest rates are still expected to come down sharply over the next few months in order to prevent a deep recession.

The Office for National Statistics said on Tuesday rocketing utility bills pushed inflation higher by half a percentage point in September to way more than double the central bank's 2 percent target. Analysts had predicted a rise to 5 percent.

Bank of England policymakers had already factored in the latest jump when they cut interest rates by half a percentage point last week in an emergency move last week to shore up the economy in the face of a global financial crisis.

They are worried the economic outlook has got a lot worse over the last month and two separate surveys on Tuesday showed house prices falling faster in September and retail sales posting an annual fall for a fourth straight month.

Analysts expect interest rates to come down from their current 4.5 percent very, especially as lower oil prices should mean inflation will fall sharply.

"September's figure will be the peak in inflation and the key issue now is just how far it will drop back as the food and energy effects which have pushed it up so sharply finally fade or go into reverse," said Jonathan Loynes, chief European economist at Capital Economics.

"Needless to say, steep falls in inflation will help to restore households' spending power and allow the Monetary Policy Committee to cut interest rates very sharply. We continue to expect rates to drop to 2.5 percent or less."

ECONOMIC GLOOM