Page last updated at 12:39 GMT, Tuesday, 14 October 2008 13:39 UK

Consumer inflation reaches 5.2%

Petrol pump
Falling oil prices should soon offer consumers some respite

UK inflation hit a 16-year high of 5.2% in September, with energy bills behind much of the rise, figures have shown.

The Consumer Prices Index (CPI) measure was up from 4.7% in August.

However, analysts expect this to mark a peak, with inflation tipped to slow as a result of lower oil prices and reduced demand in a slowing economy.

September's Retail Prices Index (RPI) figure - used to work out benefits and state pensions for the coming year - rose to 5% from 4.8% a month earlier.

The key issue now is just how far and fast inflation will drop back as the food and energy effects... finally fade or go into reverse
Jonathan Loynes
Capital Economics

Pensions usually increase by 2.5% or headline RPI, whichever is higher - meaning the government faces paying out billions more in benefits and pensions.

'Diluting' effect

The recent economic downturn has seen recession replace inflation as the key risk to the UK economy.

Last week, the Bank of England cut interest rates to 4.5% from 5% in a co-ordinated worldwide move. The Bank added that the risks of inflation had moved "decisively" to the downside.

However the high inflation figure will be a reminder of the inflationary risk, some observers say.

Increased food and energy prices this year have been blamed for taking inflation beyond the government's 2% target.

And the Bank predicts it will remain above that level until well into next year.

Traders in Birmingham discuss how the credit crunch is affecting sales

But reduced economic activity, rising unemployment and the continued difficulty in getting credit would curb spending and "dilute underlying inflationary pressures", said Howard Archer, chief UK and European economist with Global Insight.

Inflation is likely to fall as low as 1% by autumn 2009, and could turn negative if oil prices continued to fall, according to Jonathan Loynes, chief European economist at Capital Economics.

"CPI was once again rather worse than expected in September, but this will be the peak in inflation," he said.

"The key issue now is just how far and fast it will drop back as the food and energy effects which have pushed it up so sharply over the last year finally fade or go into reverse."

The annual rate of inflation for energy and other household bills reached 15% - the highest since 1989 - the Office for National Statistics said.

More expensive clothing, footwear, toys and games also added to the cost of living.

Food inflation slowed for the first time since March as the price of milk held steady, but the cost of meat continued to climb.

Changing habits

The squeeze on consumer spending hit High Street stores last month, according to the latest survey from the British Retail Consortium (BRC), released on Tuesday.

For the savvy shopper there are a lot of bargains to be had
Stephen Robertson, British Retail Consortium

Like-for-like sales - which strip out the impact of new stores - were down 1.5% in September compared with a year ago. Sales have now been down in six of the past seven months.

The BRC said that food and drink was the only sector to show sales significantly up on a year ago.

Clothing and footwear sales in September remained poor, while sales of furniture and homewares were "well down" on a year ago.

The BRC's director general, Stephen Robertson, told the BBC that consumers were changing their shopping habits.

"They're doing more cooking and less ready-prepared food, they're shopping around more, and indeed for the savvy shopper - and I'm thinking here particularly of non-foods - there are a lot of bargains to be had as price deflation and fierce competition between stores means there's more promotions, more discounts and more deals that I've ever seen before," he said.

"The bad news is extraordinary increases in gas and electricity prices are wiping out these gains, pushing overall inflation higher and hurting hard-pressed families and retailers of all sizes."




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