August inflation hike fuels expectation of 5% peak this year

Inflation looks set to hit its 5% peak before the year-end, after a modest increase in August.

Latest figures from the Office for National Statistics show Consumer Price Index inflation rose to 4.5% in August, up from 4.4% in July, while the Retail Prices Index increased to 5.2% from 5% in July.

Many economists predict inflation will peak at 5% before the end of 2011, then fall again.

Jonathan Loynes, chief european economist at Capital Economics, says the small rise is in line with the consensus forecast.

He says: “The headline inflation rate may still be heading for about 5% in September or October. After that food and energy effects should fade fast, while core inflation 3.1% in August should fall as VAT and sterling effects fall out and the weakness of consumer spending bears down on retailers’ margins.”

Capital Economics expects inflation to be well below its 2% target at the end of next year.

Jonathan Samuels, chief executive officer of Dragonfly Property Finance, says: “Inflation would have to rise more sharply before the Monetary Policy Committee would consider increasing the base rate. Its priority is to get the economy moving.”