Inflation continues to accelerate, fuelled by bumper energy prices

INFLATION accelerated in November to a six-month high of 1.9 per cent as higher energy costs fuelled price rises and pushed the rate closer to the Bank of England’s two per cent target.

The retail prices index (RPI), on which many wage negotiations are based, moved back into positive territory for the first time since last January, jumping to 0.3 per cent from -0.8 per cent the previous month.

Petrol prices rose 2.8 per cent last month (even though fuel and light costs were down 7 per cent on a year ago as graph shows), adding 0.4 percentage points to the consumer prices index (CPI). But City analysts said further fuel price effects and reversal of the VAT cut are projected to lift headline inflation to 2.6 to 2.7 per cent.

But petrol was not the only driving factor – consumer prices excluding energy, food, alcohol and tobacco rose an annual 1.9 per cent in November, and had VAT not been cut last December, core inflation would probably stand at 2.7 to 2.8 per cent, Henderson’s Simon Ward said. He forecasts RPI inflation to reach four per cent or higher by next spring: “The VAT reversal, energy effects and recovering house prices will push the headline rise well above three per cent.”

The Bank said in November that it would look through the short-term boost to inflation from higher energy prices thanks to the output gap, but most analysts expect the Bank’s governor Mervyn King to have to write a letter of explanation to the chancellor.

But Citigroup’s Michael Saunders says sterling’s depreciation will have a larger effect than some – including the MPC – expect. “Only a small part – not even one third – of the inflation boost from the pound’s decline has yet fed through to UK core CPI. Most of the effects still lie ahead and will continue to boost inflation.”