Economy: Energy prices help push CPI inflation up to 4.4%

THE squeeze on household budgets continued last month as the rate of inflation edged higher once more, official figures revealed today.

Following an unexpected fall in the Consumer Prices Index in June, to 4.2% from 4.5% the previous month, the measure rebounded to 4.4% in July, the Office for National Statistics said.

The increase was in line with expectations, with the Bank of England Monetary Policy Committee (MPC), which is responsible for setting interest rates, having already indicated that it expects the CPI to hit 5% before the end of this year.

July is usually a big season for summer sales, tending to pull the inflation figure downwards, but the ONS said there was evidence of retailers having brought their sales forward this year to June, in a move to attract cash-strapped customers.

While clothing, furniture and household good prices fell on a monthly basis compared with June, the decrease was much smaller than a year ago, applying upward pressure on the overall cost of living.

On a year-on-year basis, clothing and footwear prices were up by 3.1% last month, the highest annual surge since records began in 1997, the ONS said. Housing, water, electricity, gas and other fuels increased by 4.6% on an annual basis, the highest increase in two years.

Food bills were 0.3% higher month on month and 6.2% higher compared with a year ago, while alcohol and tobacco were 0.6% higher on a monthly basis and 10.3% higher than last July.

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Despite the increase in inflation, economists do not expect the MPC to raise interest rates until next year at the earlier, given the fragile nature of the recovery which saw the UK economy grow by just 0.2% in the second quarter of this year.

In his latest letter to Chancellor George Osborne, which he is require to write every three months when inflation remains more than a full percentage point adrift from the Government’s 2% target, Bank of England governor Sir Mervyn King said it was likely that the CPI would be below target but for “temporary” factors including January’s increase in VAT to 20% and rising energy and import prices.

In his reply, Mr Osborne said the Government’s spending cuts continued “to provide the MPC with the space it needs to target low inflation”, with any fiscal relaxation running the risk of forcing a tightening in monetary policy.