Britain's annual inflation rate edged higher in October as record oil prices caused gas, electricity and other household bills to climb at their fastest rate in at least seven years, official data showed yesterday.
The rise to 1.2 per cent from 1.1 per cent in September is likely to be of little concern to the Bank of England as inflation remains well below the bank's two per cent target. In any case, the BoE is more concerned with what inflation does in coming years.
While higher energy costs have many analysts wondering over when and if they will filter through to non-utility bills, tough competition on the high street and falling goods prices have kept inflation under wraps.
"Inflation remains significantly below target in the UK and we continue to think that, on balance, interest rates are likely to remain on hold through 2005," said Melanie Baker, economist at Morgan Stanley.
Government bonds did not react to the data from the Office for National Statistics, as analysts are still divided on whether rates will climb one more time from 4.75 per cent. Financial markets are increasingly convinced, however, that rates have peaked and could even fall next year.
The pound fell to an 11-month low against the euro, but that move was driven by an earlier report showing house prices tumbled at their fastest rate in 12 years.
"Inflation at these low levels, despite the pick up, is far from a hawkish signal," said John Butler, UK economist at HSBC.
The housing, water, electricity, gas and fuels component of the consumer price index (CPI) gained 4.4 per cent on the year, its biggest gain since records began for this series in 1997, the ONS said.
That came as British Gas, the country's biggest supplier and a unit of utility Centrica Plc, raised its gas prices by 12.4 per cent and its electricity charges by 9.4 per cent from September 20.
Centrica said those extra charges would add about £47 a year to the average gas bill and £25 to the typical domestic power bill.
Powergen, the country's second biggest energy provider and part of Germany's E.ON, has planned a 10 per cent price hike later this month and so utilities will likely be working to push up CPI in November too.
That comes even as US crude oil prices, which topped $55 a barrel, have eased to around $47 currently.
"It remains possible that higher energy costs (some of which are already coming through) mean that the MPC's forecast for inflation in the near-term is exceeded despite the recent decline in oil prices," said George Buckley, UK economist at Deutsche Bank.
Figures published last week showed that prices of goods leaving Britain's factories rose to a nine-year high in October, mainly due to rising petrol prices.
Further upward effects on overall CPI came from package holidays and food, and there was a small upward effect from clothing and footwear. Price reductions for cars, certain travel fares and TV and video rentals had an offsetting effect.
Separately, the ONS said the Retail Price Index, which includes various housing components that the CPI does not measure - like the council tax, a municipal tax - climbed to its highest since September 2000, up an annual 3.3 per cent.
The RPI housing component rose 12.0 per cent on the year, the biggest annual gain since March 1991 when it was up 14.0 per cent. That was mainly due to depreciation, or the amount home owners need to spend to maintain their property.