Soaring Oil Prices Fuel Another Inflation Hike

By Iain Laing

A surge in petrol prices pushed the annual rate of inflation higher in September for the fourth straight month, official figures showed yesterday.

The Consumer Prices Index (CPI) rose to 2.5% last month from 2.4% in August ( remaining at its highest level since current records started in 1997.

This was weaker than many analysts had predicted, due to sectors such as clothing and footwear.

A major factor in the increase was a sharper rise in the cost of transport, as petrol prices went up by 4.6p a litre on the month.

Another major upward effect came from recreation, mainly because last year’s special offers on computer games consoles were not repeated this year.

The biggest downward effect came from clothing and footwear, as the price of the new season’s stock increased by less than a year ago.

There were also sales on some items of children’s clothing compared with increases last year. A steep fall in air fares offset the higher price of petrol.

The latest increase drove the rate of inflation above the Government’s 2% target for the third consecutive month.

In its quarterly Inflation Report in August, the Bank of England predicted CPI inflation would rise above the target in the short term.

The Bank said it would then ease off again before once again passing this level at the end of the two-year forecast period. The headline rate of Retail Price Index (RPI) inflation, which includes mortgage interest payments, fell to 2.7% from 2.8%, while the underlying rate rose to 2.5% from 2.3%.

John Butler, economist at HSBC, said the rise was “almost entirely” down to energy prices.

He said: “The underlying picture is subdued, in particular pressure on the high street remains high.”

He believed the Bank’s rate-setting Monetary Policy Committee (MPC) would be comforted by the pattern, and predicted inflation would peak in November before easing in the following months.

Said Ross Walker, UK economist at RBS Financial Markets: “Some of the concerns out there about CPI hitting 3% look overdone ( at least in the short term. Unless we get another surge in oil prices, this may well mark the peak.” Crude oil recently reached record highs of $70 a barrel amid fears over the effect of Hurricanes Katrina and Rita.

However, prices are now beginning to fall back slightly.

Analysts added the UK could “breathe a sigh of relief” over the predicted fallout for interest rates.

Said David Brown, chief European economist at Bears Stearns International: “These numbers probably pull the argument away from Mervyn King’s implied hawkishness against higher rates back to the doves camp and for the UK easing bias to stay intact,”

Howard Archer at Global Insight said he believed the “door was still ajar” for a rate cut this year ( particularly as core inflation had remained steady.