October 18, 2011 / 8:32 AM / 8 years ago

Inflation hits three-year high

LONDON (Reuters) - Inflation hit a three-year high in September driven by soaring gas and electricity bills, data showed on Tuesday, adding to a severe squeeze on Britons’ living standards as wages fail to keep up with rising prices.

Some sterling money in coins and bank notes is seen in this file photo dated 2005. REUTERS/Catherine Benson

The jump highlights the risk to the Bank of England’s recent move to revive the faltering economic recovery with a fresh dose of quantitative easing, which could add to inflation already way above the BoE’s two percent target.

The central bank expects inflation to drop sharply 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.

Consumer prices rose 0.6 percent last month, taking the annual inflation rate to 5.2 percent, the highest since September 2008, the Office for National Statistics said.

CPI has never been above 5.2 percent since the introduction of the measure in January 1997. Analysts had expected the annual rate to jump to 4.9 percent from 4.5 percent a month earlier.

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.

Gilt futures pared gains briefly on the data, and economists said that high numbers were unlikely to affect the BoE’s commitment to pump billions of pounds of newly-printed money into the economy over the next four months to forestall longer-term deflationary risks.

“Absolutely zero,” was Scotia Capital economist Alan Clarke’s assessment of the effect the data would have on monetary policy.

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

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.

Clarke said that an upward push to inflation from higher fuel prices had been expected, but less so a rise in the underlying rate of inflation, which increased to 3.3 percent from 3.1 percent.

“What is surprising is that core inflation has picked up. There’s misery on the high street, the economy’s on the verge of recession, but retailers are managing to raise prices,” Clarke said.

Last week, Bank of England chief economist Spencer Dale told Reuters that inflation was likely to have exceeded 5 percent in September, but should fall sharply early next year and continue to ease during 2012.

The Bank has launched a second round of quantitative easing, pumping 75 billion pound into the economy, as it worries that the weak economy may push inflation too far below its 2 percent target in the medium-term.

Additional reporting by David Milliken, editing by Mike Peacock

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