UK inflation expected to fall to lowest level in three years

16 Oct

Inflation is expected to have dropped to its lowest level for nearly three years in September, but there are fears the respite may only be brief as energy bills start to rise.

Most experts believe official figures on Tuesday will show consumer price index (CPI) inflation falling to 2.2% in September from 2.5% in August – but some believe it could even drop to below the government’s 2% target.

Vicky Redwood, at Capital Economics, is pencilling in a fall to 1.9%, which would be the first time CPI has been under 2% since November 2009.

The decline would be bad news for basic state pensions and those on benefits, as the government uses September’s CPI figure to calculate their payment increases the following April.

Last year’s sky-high inflation would have offered a boost to pension and benefit payments, but falls in CPI in recent months will probably mean a less impressive increase, although the final decision is announced by the government in December.

There may be greater cheer from households at the news of lower inflation, but a question mark remains over the path for CPI as petrol and utility bills rise, with worries over food prices as well.

British Gas and Npower became the latest energy groups to announce tariff hikes, following SSE’s move to up prices this month.

Howard Archer, chief economist at IHS Global Insight, said the September inflation figures could mark the trough in recent falls.

“Consumer price inflation could well be pushed back above 2.5% by the move back up in petrol prices, some utility bills rising in October and November and likely higher food prices largely due to poor harvests pushing up grain prices,” he added.

Philip Shaw, chief economist at Investec Securities, warned CPI would hit 3% by mid-2013. He said: “A near tripling in university tuition fees should push CPI inflation up in October, with further food and energy price increases likely to add to that rising trend.”

A rising inflation outlook could hold policymakers back from launching more quantitative easing (QE).

Many economists believe the Bank of England will pump more cash into the economy in November, but rising price pressures may dampen QE expectations.

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