October 18, 2011 / 8:34 AM / 8 years ago

Inflation at 3-year high tightens squeeze on Britons

LONDON (Reuters) - Inflation in Britain hit a three-year high in September driven by soaring gas and electricity bills, further eroding living standards and piling more pressure on the government to help struggling consumers.

Customers shop for groceries in a supermarket in London October 18, 2011. REUTERS/Neil Hall

Britons are already suffering from the worst squeeze in living standards in over 30 years as runaway prices, higher taxes and slow wage rises eat into their budgets.

Many have cut back on spending, threatening the faltering economic recovery as consumers account for about two-thirds of gross domestic product.

Consumer prices rose 5.2 percent on the year last month, the highest since September 2008, the Office for National Statistics (ONS) said.

CPI has never topped that level since the introduction of the current measure in January 1997. Analysts had expected the annual rate to jump to 4.9 percent from 4.5 percent in August.

Britain now has the second highest annual inflation rate in the European Union after Estonia. The EU average is 3.3 percent.

Scotia Capital economist Alan Clarke said while the jump was expected overall, the rise in core inflation, which strips out volatile prices of energy, food, alcohol and tobacco, to 3.3 percent from 3.1 percent had come as a surprise.

“There’s misery on the high street, the economy’s on the verge of recession, but retailers are managing to raise prices,” he said.

POLITICAL HEADACHE

Soaring prices in Britain have become politically charged as more and more households struggle to make ends meet, and the government is under pressure to boost the economy at a time when its goal to erase the huge budget deficit over the next five years looks already hard to achieve.

“Inflation is soaring, unemployment is out of control and there are no signs of growth,” the general secretary of the Unite union, Len McCluskey, said.

“The coalition government is piling misery upon misery for ordinary families. Now more that ever Britain needs a plan B from this government,” he said in a statement.

The finance ministry said the jump was driven by high global oil and gas prices and was in line with the Bank of England’s analysis, which predicts a sharp drop in inflation next year.

“The government is taking action to help consumers with current high costs, including cutting fuel duty and freezing council tax, and the Prime Minister met yesterday with energy suppliers to discuss how to bring down customers’ energy bills,” a spokesman said.

The September inflation rate will also provide the base for adjustments to benefits and state pensions, driving up costs for the government, though higher inflation can also boost tax receipts, limiting the impact on Britain’s deficit.

POLICY RISKS

Sterling fell versus the dollar after the inflation data was released, adding to concerns the economy could face a prolonged period of elevated inflation and stagnant growth.

However, economists said high inflation was unlikely to curb the Bank’s commitment to the fresh round of quantitative easing aimed at forestalling longer-term deflationary risks.

Bank of England policymakers have warned that inflation would jump above 5 percent, nearly three times the Bank’s 2 percent target.

But the Bank expects a sharp drop next year, when one-offs, like this year’s value-added tax rise, fall out of the equation and the weak economy dampens wage and price increases.

The Bank decided to inject an additional 75 billion pounds of newly-printed money into the economy to avert a recession as the economy has barely grown for nearly a year and the risks from the euro zone crisis are growing.

However, critics of the central bank have said that high inflation itself is hitting growth.

Cash-strapped Britons have been switching to discount grocers like Aldi and Lidl, as well as cheaper brands.

Whitbread Plc said on Tuesday its Premier Inn hotel chain had performed strongly through the economic downturn as business customers trade down from four- and five-star hotels and cheap rooms woo leisure customers in off-peak periods.

Bills for gas, electricity and other fuels rose 18.3 percent on the year in September, while transport costs were up 12.8 percent. Food prices were 6 percent higher than last year.

The ONS said the recent price rises of four of the six large utility companies had been factored into the inflation figure. The other two will be reflected in the October print.

The retail price inflation gauge, which includes more housing costs and is the benchmark for many wage deals, rose 5.6 percent year-on-year, its highest level since June 1991.

Additional reporting by David Milliken and Matt Falloon; editing by Anna Willard

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