Inflation untouched by cheaper fuel

FuelFalling fuel prices failed to make a dent on inflation in September as it remained at 2.7%, against expectations of a slight fall.

Lower costs at the petrol pumps were offset by an upward contribution to the Consumer Prices Index (CPI) from air fares, including an increase for domestic flights.
%VIRTUAL-SkimlinksPromo%The figures from the Office for National Statistics (ONS) will be disappointing for policymakers hoping to see inflation start to drop towards the Bank of England's annual rate target of 2%.

A separate measure of inflation, the Retail Prices Index, fell from 3.3% in August to 3.2% in September.

Petrol prices fell 0.2% over the month, or 0.5p per litre, to stand at £1.37 a litre. This compared with a 2.7% rise for the same period in 2012.

However, a usual decline in air fares at this time of the year was smaller than normal for long-haul and European flights, while domestic flight prices rose.

Elsewhere, education inflation reached an all-time high of 21.4% since records began in January 1997 as new rates for evening classes and private schools added to the ongoing impact of tuition fees.

Food inflation stood at around 4.8%, still well ahead of wage increases but little changed on last month.

Fruit and vegetable price rises nudged up, driven by plums and organic apples, as well as cauliflowers, onions and premium potato crisps.

Other foods including bread and cereals, fish, jam and chocolate had a downward effect.

A recently introduced experimental measure of inflation, CPIH, which includes housing costs, remained unchanged at 2.5%. Another experimental measure, RPIJ, fell to 2.5% from 2.6% in August.

The recent announcement of a tariff hike by gas and electricity supplier SSE - the first such move by one of the Big Six energy firms this year - has raised fears of upward pressure on inflation.

CPI has remained stubbornly above the Bank of England's target since December 2009, meaning families have been squeezed as wages fail to keep pace. Average earnings increased just 1.1% in the three months to July compared with a year earlier.

Analysts had on average predicted that CPI would fall back to 2.6% in September.

The Bank of England has been forced to tolerate high inflation for the sake of the recovery but if hopes of falling CPI fail to materialise, it could jeopardise governor Mark Carney's forward guidance on interest rates.

Policymakers have pledged to keep them at rock-bottom levels until unemployment falls to 7% but high inflation is one of the caveats or "knockouts" that could override the guidance.

The knockout would come into effect if inflation were expected to be 2.5% or more on an 18-month to two-year horizon.

Economists said indicators such as producer prices suggested that further down the track inflation was likely to slow.

James Knightley, an economist at ING Bank, said: "The main risk is utility bills, which could rise sharply in coming months and keep inflation remaining well above the 2% central target."

Samuel Tombs, of Capital Economics, said: "September's UK consumer prices figures are not a significant blow to hopes that inflation is on course for a low rate."

However, Chris Williamson, chief economist at Markit, said: "There remains a significant risk that inflation could remain higher than many - including the Bank of England - are expecting over the next year."
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