Fears for households as inflation rises

A first rise in inflation in seven months during October today prompted fears of more pain ahead for household finances hit by recession.

The Consumer Prices Index (CPI) rose from 1.1% to 1.5% in October - mainly due to a much smaller fall in forecourt prices than the record plunge a year earlier caused by tumbling oil prices.

The first rise in the index since February was followed by warnings that soaring petrol prices would ratchet up the inflation pressure in the coming months.

According to the AA, average UK petrol prices reached a record 108.69p a litre yesterday - the highest in more than a year and well above the 105.4p October average recorded by the Office for National Statistics (ONS).

The end of the temporary VAT cut will add a further 2.4p to petrol prices in January, the organisation warned - taking prices well over the £5-a-gallon mark.

"At today's average price, a litre of petrol will cost more than £1.11 - a sobering prospect for the New Year," a spokesman said.

Petrol prices peaked at 119.7p in July 2008 but have bounced back 22.8p since January's low of 85.89p. Diesel prices are also at a year-high of almost 110p a litre.

Although CPI is still below the Bank of England's 2% target, today's figure is slightly above the 1.4% expected by the City.

Other reasons behind the rise included a bigger than expected jump in food prices, a record rise in second-hand car costs and higher air fares. DVDs, computer games and landline telephone costs also rose.

The Bank expects inflation to climb above its target in the months ahead after the VAT cut is reversed.

Governor Mervyn King could be forced to write another letter to the Chancellor to explain why inflation is more than 1% above target in January, according to JP Morgan economist Malcolm Barr.

"The likelihood of a temporary rise in inflation is widely established, but we continue to think the magnitude of the move up has the potential to be troublesome for the Bank's Monetary Policy Committee (MPC)," he said.

But other experts said the short-term rise in inflation was unlikely to divert the Bank of England from its policy of record low interest rates and a £200 billion boost to the money supply to combat recession

Daiwa Securities economist Colin Ellis said: "Higher energy prices and a weaker exchange rate, which has pushed up goods price inflation this year, cannot by themselves generate permanently higher inflation - they just result in a temporary surge.

"The MPC should look through these price movements, and the short-term volatility that will be seen over the next few months and focus instead on underlying inflationary pressures."

The Retail Prices Index, which includes house prices, rose from minus 1.4% to minus 0.8% on the month - the biggest month-on-month rise in more than 19 years.

The same factors influencing the CPI affected the RPI - with the added impact that house prices are now rising compared with falls a year earlier.