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Inflation Soars To 16-Year High

Inflation Soars To 16-Year High


The inflation rate has gone up to 5.2%, the highest level since 1992, after gas and electricity price hikes.

September"s figure for the Consumer Prices Index compares with a rate of 4.7% in August.

The latest figure is well above the Government"s target of 2% - but some analysts have predicted that the cost of living may have now peaked.

The Bank of England - which cut interest rates by 0.5% in a coordinated worldwide move last week - is also turning its attention towards avoiding a severe recession following the current financial turmoil.

Following the price hikes for gas and electricity - and an earlier round of increases in January - electricity prices are up 30.3% year on year, with gas costs up almost 50%.

But there was some better news as food inflation slowed for the first time since March, largely due to unchanged milk prices last month compared with a 4p rise a year earlier.

Meat prices however continued to rise, with bacon almost 20% dearer than a year earlier.

As crude oil prices fall, the average price of petrol also fell by an average 1.7p a litre between August and September, compared with a smaller decline a year earlier.

The Bank of England"s Monetary Policy Committee said the risks to inflation had shifted "decisively" to the downside.

This means policymakers are now more worried about undershooting their 2% inflation target as prices fall in a recession.

This is a far cry from the inflation worries which kept rates on hold at 5% since April.

Bank Governor Mervyn King - who has written two explanatory letters to the Chancellor - has said there is "bound to be" a quarter or two of negative growth.

But fears on the Bank"s Monetary Policy Committee of a more severe downturn are growing.

MPC member Andrew Sentance - a former inflation hawk - said: "The severe stresses in the financial system over the last month and the downside news from the real economy have certainly increased the risks of a bigger and more sustained downturn."

This risk, he said, shifted the policy focus more clearly on to the downside inflation risks - meaning more rate cuts on the way.

While the Bank predicts inflation will be above the 2% target until well into next year, experts say falling demand will bring it back in check later next year helped by factors such as falling oil prices.

Howard Archer, chief UK and European economist with Global Insight, said: "Prolonged very weak economic activity, faster rising unemployment and extended tight credit conditions will increasingly dilute underlying inflationary pressures.

"The recent marked retreat in oil and commodity prices will obviously help matters, along with favourable base effects.

"This should substantially outweigh the inflationary impact of the weaker pound."











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