Higher oil and transport prices pushed annual inflation up to 2.5 per cent last month, from 2.4 in August but the main surprise in Tuesday’s official figures was that this was lower than feared.
The consumer price index - the Bank of England’s target measure - continued its steady climb from 1.1 per cent in September 2004, according to the figures from the Office for National Statistics, but a steep fall in air fares prevented the annual rate reaching the 2.7 per cent expected by most economists.
Although the 2.5 per cent annual rate means that inflation has moved further from the Bank’s 2 per cent target, it is still well below the 3.1 per cent level which would trigger a letter of explanation from Mervyn King, Bank governor, to Gordon Brown, chancellor.
The lower-than-expected rate - while at a record high for the series which began in 1997 - leaves open the possibility of another interest rate cut, though expectations of one materialising next month have receded.
Howard Archer of Global Insight, the consultancy, said: “we believe the door is still ajar for an interest rate cut in November, although it is likely that the hawkish members of the monetary policy committee, in particular, will want to see sustained evidence that underlying inflationary pressures remain contained before supporting such a move.”
Rachel Lomax, deputy governor in charge of monetary policy, on Monday echoed remarks made recently by Mr King and Paul Tucker, director of markets, of the danger that high oil prices could undo the Bank’s so far successful efforts to anchor inflation expectations among the public to the 2 per cent target.
The three MPC members, along with Sir Andrew Large, the outgoing deputy governor for financial stability, voted against August’s quarter point cut, partly for this reason.
The core measure of CPI inflation, which excludes energy and seasonal foods, remained stable at 1.7 per cent. The annual rate of RPI drifted down to 2.7 per cent from August’s 2.8 per cent, partly because of lower mortage interest payments. Wage deals and pensions are likely to be increased in line with this figure, as September is traditionally the uprating month for benefits.
RPIX, which excludes mortgage interest payments, fell below CPI inflation for the first time in August but a jump in RPIX to 2.5 per cent from August’s 2.3 per cent put the two measures in line with each other last month.
The ONS said the main reason for the rise in annual CPI inflation last month was higher transport costs as petrol pump prices continued to rise, reflecting movements in crude oil prices. The average price for ultra-low sulphur petrol rose by 4.6p per litre last month, compared with a rise of around 0.1p a year ago.
Recreation and culture also helped to push up inflation mainly because special offers last year on computer game consoles were not repeated this year and because of a rise in theatre ticket prices.
The downward pressures on CPI inflation came partly from air travel. Although the steep fall in air fares was similar to last year, it has a higher weight in this year’s index, making its impact bigger.
Clothing and footwear, in particular women’s and children’s outerwear, also exerted downward pressure.
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