Inflation expected to reach three-year high as utility bills soar

September is likely to have been a “nasty month” for inflation as the consumer prices index (CPI) is expected to hit a three-year high tomorrow. The chief influence on inflation, which is forecast to hit the 5 per cent mark after reaching 4.5 per cent in August, was rising utility bills after price rises from two major providers, Scottish & Southern Energy and E.ON, during the month.

E.ON lifted electricity tariffs by 11.4 per cent and gas by 18.1 per cent on September 13 while SSE raised gas prices by an average of 18 per cent and electricity prices by 11 per cent the following day. British Gas and Scottish Power introduced their own hikes in August. However, the figures are unlikely overly to concern the Bank of England, which has already forecast inflation to rise to five per cent this year and recently increased its quantitative easing programme in a sign that growth problems outweighed the threat inflation poses to the economy.

Earlier this month, Bank of England Governor Sir Mervyn King warned that Britain could be facing its most serious financial crisis ever.

Philip Shaw, chief economist at broker Investec, expects CPI to hit 5.1 per cent, just shy of the 5.2 per cent reached in September 2008, as the utility hikes alone add 0.4 per cent to inflation.

He said: “September should be a nasty month for inflation, with the CPI rate set to rise sharply from August’s already elevated 4.5 per cent.”

Elsewhere, evidence from the British Retail Consortium suggests food prices remained elevated in September, despite the cost of some commodities, such as oil and corn, pulling back.