Inflation to hit fiveyear high as cost hikes gather pace

Rising airfares, fuel and electricity prices add to pressure on households

By Inflation is expected to hit a five-year high when official figures are released next week as rising electricity costs, fuel and airfares increase the financial pressure on households.

The consumer price index (CPI) measure of inflation is forecast to come in at 3 per cent for September, marking its highest level since April 2012 and on the cusp of forcing Bank of England governor Mark Carney to publicly explain why the rate has risen to such an extent.

The Bank’s inflation target is 2 per cent, and Carney must write a letter to the Chancellor when inflation is more than 3 per cent or less than 1 per cent.

An Investec research note by chief economist Philip Shaw said: “Our calculations point to an uptick in CPI inflation to 3 per cent, placing it right on the edge of the monetary policy committee’s (MPC) tolerance threshold.

“That being said, we don’t discount the possibility that this limit will be breached, which would then require the governor to pen an explanatory letter to the Chancellor at the next inflation report, explaining the more than one percentage point overshoot of the Bank of England’s inflation goal.”

Carney would also have to outline what he proposes to do to ensure inflation returns to target. The Bank has so far allowed CPI to run above target, as its upward move has been primarily driven by sterling’s post-brexit vote declines, rather than a fundamental rise in costs.

Investec said it believes that while clothing prices are likely to have dropped in September – due to high comparable figures in the same month last year – transport costs will “more than offset this”.

The first wave of Ryanair flight cancellations which came towards the end of the inflation survey period will also have seen affected passengers scramble to book with alternative airlines.

Fuel prices are also expected to lift – after Hurricane Harvey disrupted US oil production – adding to pressure from a 12.5 per cent electricity price hike by British Gas which came into affect in the middle of last month.

Thereisgrowingspeculation that the MPC could raise interest rates as early as November, particularly after minutes from its September meeting showed that all policymakers believed “some withdrawal of monetary stimulus was likely to be appropriate over the coming months”.

But while an interest rate hike could go some way in reducing inflation, there are warnings that the UK economy is not yet strong enough to handle a rise.

Ratings agency S&P has said that rate hike talk by the likes of Carney are primarily aimed at propping up the pound to reduce inflation pressure.

Nathanlong,apensionsanalyst at Hargeaves Lansdown, said next week’s figure also has significant implications for state and public sector pension scheme increases for next year which are based on September’s inflation figure.

businessdesk@scotsman.com