Inflation hits 19-year high

There’s another awkward ‘Dear George’ letter from the governor of the Bank of England in the offing, after inflation hit 5.2% in September. That’s its highest level in 19 years and only the second time it’s topped 4.7% since its 7.2% peak in March 1992, according to figures by the Office for National Statistics. The rise was, predictably, driven by rocketing prices from the ‘big six’ energy companies. Some economists reckon that from here on in, it will begin to slide. But that isn’t taking into account the effect of the latest round of quantitative easing…

It’s no surprise energy price rises are such a strong contributing factor to the figure: after all, bills for gas, electricity and the like rose by 18.3% in the year to September. But the ONS added that it’s only factored price rises at four of the ‘Big Six’ utility companies into September’s figure – the other two will come in October, so the pain isn’t over yet. We’ll see whether, in the long term, David Cameron’s plan to make energy firms ‘nudge’ their customers toward cheaper utility tariffs will have any effect…

Elsewhere, food prices rose by 6% year-on-year, while transport costs were up by 12.8%. So not a particularly pleasant year for those who eat, travel or use electricity. Everyone else, on the other hand, should be fine…

What’s significant about the figure is that September is the month used by Government economists to determine the level to set benefits at for the next year. Obviously, depending on which end of the political spectrum you’re at, that’s either a Very Good Thing (at least the poor won’t lose out) or a Very Bad Thing (the Government will have to borrow even more to foot the bill). But given that most of the country has just seen the biggest fall in average income in 35 years, there will undoubtedly be some who could do with a bit of extra cash…

Some economists are reasonably confident that this will be the peak of inflation, and that it should start to slide ‘rapidly’ over the next few months, dropping below the Bank of England’s target rate of 2% by 2013. Although that’s not taking into account the effects of this month’s round of quantitative easing, which injected a further £75bn into the economy.

Not that it’s particularly easy to tell what the result of that will be, but there are three distinct possibilities: 1) the money flows freely into the economy without any effect on inflation; 2) The money flows freely into the economy, pushing inflation up very slightly. Or, 3) the money festers in corporate bank accounts, only to be released five or so years down the line, when companies are less worried about the idea of spending – whereupon it will push up inflation rather more significantly.

Whatever happens, once you’ve put all that cash into the economy, it’s impossible to get back. So this might not be the end of high inflation quite yet…