Inflation expected to rise again

Inflation figures released later will reveal whether the cost of living for households has gone up again. Most experts predict the latest round of price hikes from energy firms will have pushed the Consumer Prices Index (CPI) - the Bank of England's official inflation benchmark to a new record of 5 per cent in September. But the dramatic events of the past month in the banking world have seen recession replace inflation as the key risk to the UK economy. The Bank - which cut interest rates by 0.5 per cent in a co-ordinated worldwide move last week - said that the risks to inflation had shifted "decisively" to the downside. This means policymakers are now more worried about undershooting their 2 per cent inflation target as prices fall in a recession. This is a far cry from the inflation worries which kept rates on hold at 5 per cent since April. Bank Governor Mervyn King - who has written two explanatory letters to the Chancellor in the current run higher - 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. While the Bank predicts inflation will be above the 2 per cent 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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ITN | October 14, 2008

Tags:. .september. .key. .gone. .banks. .banking