Financial Times FT.com

Familiar culprits drive surprise jump in bills

By Delphine Strauss

Published: May 14 2008 03:00 | Last updated: May 14 2008 03:00

Soaring household bills for food, gas and electricity were the familiar culprits driving yesterday's surge in consumer price inflation, but signs of more widespread price pressures will trouble policymakers trying to steer inflation back to target.

The surprise jump from 2.5 per cent to 3 per cent in annual inflation, the biggest monthly increase since 2002, reflects broad-based increases across most components of the consumer price index.

The biggest effect came from higher household energy bills as statisticians factored in the latest in a series of tariff increases already announced by utility providers. Electricity bills are now 8.3 per cent higher than a year ago and gas bills 3.7 per cent, with the impact of the tariff changes accentuated by the fact that bills were falling in April 2007.

Food inflation rose to 7.2 per cent, the highest in a decade-long series, after especially sharp increases in the prices of fresh foods such as meat and fruit, where a weaker pound is likely to have driven up the cost of European imports.

Those changes are a direct result of higher global commodity prices and sterling's depreciation. But other elements of the CPI gave no reassurance for those who argue that global price pressures can be offset by weaker domestic demand.

In recent years, the Bank of England's monetary policy committee has been able to tolerate relatively high inflation for services because cheap imports were driving down goods price inflation. Now that trend is reversing.

The latest data showed goods price inflation rising from 1.7 per cent to 2.3 per cent, while services inflation also picked up from 3.4 per cent to 3.7 per cent.

"We worry that if this sector [services] is not showing signs of disinflation despite slower economic growth, then the MPC can have little short-term confidence that inflation will be contained," said David Page, economist at Investec.

One of the biggest effects came from higher charges for financial services. Mortgage arrangement fees jumped 11.3 per cent last month as lenders sought to rebuild margins, although they were still 12.6 per cent lower than a year ago.

"The strength of services inflation is a useful reminder that the UK's inflation pressures are partly homegrown . . . and do not just reflect global costs," said Michael Saunders, economist at Citi. Many economists think weak consumer confidence will limit businesses' ability to pass on higher costs for nonessential purchases. That belief is supported by the continued slide in clothes prices, now 7.2 per cent lower than a year ago.

But prices for recreation and culture are up 2.6 per cent year on year, and book prices are 10 per cent higher.

Hotels, restaurants and retailers also largely passed on the higher excise duties on beer, wine and spirits announced in this year's Budget - even though supermarkets have often discounted alcoholic drinks as loss leaders.

Inflation will ease in the medium term as the economy slows, but for the time being, the pressures evident in last month's data are set to worsen, economists said.

Centrica, the gas and electricity group, has hinted that the recent rise in wholesale gas prices could force it to raise tariffs for the second time in a year, a move that could add as much as 0.6 percentage points to CPI inflation if followed by other utility providers.

The Office for National Statistics noted that record crude oil prices had already pushed petrol prices up 3.3p a litre between April and May. Petrol prices have recently had a downwards effect on inflation, as they were rising slower than last year, but that rise could add almost 0.1 percentage point to next month's CPI reading. Add to that the risk of further rises in commodity prices, and the imperative for businesses to pass costs on to consumers as far as possible, and the conclusion is inescapable: squeezing inflation back to 2 per cent will not be easy.

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