October 16, 2007 / 9:03 AM / 12 years ago

Inflation holds steady in September

LONDON (Reuters) - The inflation rate held steady below the Bank of England’s 2.0 percent target in September against expectations for a slight rise, as falling utility bills offset a big increase in the price of food.

A general views shows the Bank of England in London November 9, 2006. The inflation rate held steady below the Bank of England's 2.0 percent target in September against expectations for a slight pick-up, official data showed on Tuesday. REUTERS/Stephen Hird

The Office for National Statistics said consumer prices rose 0.1 percent last month, keeping the annual rate at 1.8 percent. Analysts had expected a rise to 1.9 percent.

The pound fell and interest rate futures rose after the data but most economists still expect interest rates to remain at 5.75 percent for the rest of the year as policymakers wait to see how the credit crunch plays out.

“Subdued inflation on its own is not going to force the Monetary Policy Committee into cutting rates soon,” said Philip Shaw, economist at Investec. “What is critical here is the committee’s attitude towards the credit squeeze and the likely impact on the economy.”

Bank Governor Mervyn King said last week that policymakers were still worried inflationary pressures had not gone away.

Oil prices hit a record high on Tuesday, just short of $88 a barrel, which could reverse some of the recent downward impact of energy prices on inflation.

FOOD PRICES SURGE

Tuesday’s data showed food had the biggest upward effect on inflation in September, with the price of dairy products surging 6.3 percent on the month. Bread and cereal prices were 1.4 percent higher.

Overall, food added nearly a tenth of a point to the annual CPI rate.

But that increase was balanced by falling gas and electricity bills, which shaved 0.06 percentage points off annual CPI, and a weaker rise in clothing and footwear prices.

“The hawks on the Committee are likely to put weight on the strength in food prices as another upside risk to household inflation expectations,” said Alan Castle, economist at Lehamn Brothers.

Wheat prices have nearly doubled in the last year, pushing up the price of bread, and manufacturers such as Associated British Foods, Northern Foods and Dairy Crest have all reported having to put up their prices in response to rising costs.

Still, a fall in the RPI measure of inflation, used as a basis for most pay deals, to 3.9 percent in September, should help keep wage pressures in check.

And the Rossi index, on which increases in state benefits are based, was up 2.3 percent on the year in September, compared with a 3.0 percent gain in September 2006.

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