INFLATION is set to hit its highest level since Gordon Brown became UK Chancellor. Soaring energy costs and university top-up fees are to blame, a leading investment bank is warning this weekend.

The consumer price index (CPI) will hit 2.8% by the year’s end, the highest since December 1995, and the retail price index (RPI) will peak at 3.9%, the highest since May 1998, according to fresh forecasts by the Swiss investment bank UBS.

Amit Kara, economist at UBS and the author of the report, said: “Beware inflation, it is not just academic. University and college fees in England and Wales are set to rise by around 250% in October. Inflation on the RPI and the CPI measures will likely jump in October, and the effects are expected to persist for three years.”

Such rates of inflation imply the UK price level would double every 18 years and the purchasing power of sterling would halve in well under two decades, demolishing Brown’s claim that the UK economy is undergoing an unprecedented period of stability and putting pressure on Bank of England governor Mervyn King.

Higher inflation will prompt the Bank of England to raise interest rates by another half a point, taking them to 5.25% and squeezing consumers, home owners and businesses, Credit Suisse warns this weekend.

Robert Barrie, head of European economics, said: “It takes more than a quarter-point [rise in interest rates] to make difference to anything. The Bank’s model suggests it reduces inflation by less than 0.1%. On balance, we expect another 0.5 percentage points increase by the middle of next year.”

The high rate of the RPI index is especially worrying given that house prices, which are indirectly included in the index, are growing far less quickly across the UK than they used to. This means that the surge in inflation is coming almost exclusively from consumer goods and services, unlike in the past. The RPI is currently at 3.3% and the CPI at 2.5%.

The warnings from City economists come as the Bank of England is this weekend putting the finishing touches to its quarterly Inflation Report, a publication which on Wednesday will attract far more interest than usual by the markets after last week’s shock quarter-point interest rate increase to 4.75%.

The August report is expected to be more hawkish than May’s, according to 65% of the respondents to a poll of top economists by research house Ideaglobal this weekend. Remarkably, whereas 35% of respondents said it would be the same, none thought it would be more dovish.

Michael Saunders, chief European economist at Citigroup, said: “The key issue in the upcoming Inflation Report is whether the surprise hike is simply the one indicated for a little later in the May Inflation Report, or whether it is a sign that the MPC has become much more worried about inflation risks. If the former, this will be a one-off. If the latter, it will be the opening episode of a mini-series.”

The latest monetary data shows rampant money and credit growth in Britain – up 13.7% and 14% respectively in the year to June, both 15-year peaks. The money holdings of non-bank financial institutions, a key link in the transmission of money growth into asset prices, are powering ahead – up 24.5% in the year to May, according to calculations from Lombard Street Research.

From September, the maximum fee chargeable to a college or university student in England will rise by 250% from £1,200 (E1,765, $2,256) to £3,000. The ONS is under growing pressure to announce how to account for this in the official statistics. It is likely to include it immediately from October, which would send inflation soaring by an extra 0.3 percentage points on the CPI index and 0.25 percentage points on the RPI.

But the ONS may still decide to phase in the rise, which would significantly cut the increase in inflation, some economists believe. Such a move would be bound to infuriate opposition politicians and reignite the row over the ONS’s independence from the Treasury.

Higher energy bills will also boost inflation. Centrica, the largest supplier of gas in the UK, will raise gas bills by 12.4% and electricity bills by 9.4% in September. Its smaller rival EdF Energy has announced a 19% and a 9.1% rise, effective at the end of July.

Source: The Business