Household energy bills boost UK inflation

File photo / Christine Cornege

British annual inflation struck a three-year peak last month because of surging household energy bills, according to data published yesterday which added to the gloomy economic backdrop.

Britain's Consumer Prices Index (CPI) annual inflation raced to 5.2 per cent last month, compared with a level of 4.5 per cent in August, the Office for National Statistics (ONS) said.

The figure overshot market expectations for a jump to 4.9 per cent, said analysts polled by Dow Jones Newswires, and comes amid deep concern over the fragile British economy which flatlined in the nine months to June.

"By far the largest upward pressure to the change in CPI annual inflation between August and September came from increases in gas and electricity charges," the ONS said.

"There were also large upward pressures from air transport and communication services."

The retail prices index inflation rate, which includes home loan costs, jumped from 5.2 per cent in August to 5.6 per cent in September - the highest rate since June 1991.

Bank of England chief Mervyn King sought to reassure business leaders, telling them inflation "should fall back sharply early next year", and blamed the figures on temporary spikes in energy and import prices.

The dire news came one day after Prime Minister David Cameron held a summit with energy companies, consumer groups and regulators to agree various measures aimed at cutting domestic electricity and gas bills. But the ONS said household gas prices had jumped 13 per cent last month while gas prices rose 7.5 per cent.

Food added 6.4 per cent and transport prices gained 8.9 per cent. Communication costs, driven by cellphone charges, increased by 5.9 per cent.

Analysts said annual inflation might rise even further before the year's end, but should fall sharply next year as a global economic slowdown weighs on energy demand and prices.

The Bank of England has consistently warned that CPI inflation would spike above 5 per cent this year - due to high energy costs and the Government's sales tax hike back in January - before falling back next year.

The ONS said the latest CPI inflation figure was the highest since September 2008, when it had also hit 5.2 per cent. That was a record for the inflation measure, introduced in 1997. Britain was hit by double-digit inflation in the early 1990s under a separate measure.

The bank's main task is to use monetary policy to try to keep annual inflation close to a 2 per cent target level.

But it is increasingly worried about the economy sliding back into recession, according to analysts.

"We do not currently expect CPI inflation to return to the 2 per cent target in 2012 but, with the economy close to recession and the severe euro area crisis, the UK economy faces much bigger threats than the issue of whether inflation next year is 2 to 3 per cent," said Citi economist Michael Saunders.

"We expect the [Bank of England] will continue to lean in favour of extra stimulus until growth prospects improve materially."

The bank decided this month to inject a further £75 billion ($148 billion) of new money into the economy to help support growth.

Jonathan Loynes, chief European economist at Capital Economics research group, described September's spike in inflation as a "nasty surprise".

"The key point is that inflation is either at or close to a peak and should soon start to fall back quite sharply."

- AAP