LONDON BRIEFING:City gets a nasty shock as consumer price inflation hits a three-year high

IT IS not often, even in these troubled economic times, that Britain is compared with Estonia. But as the official UK inflation rate jumped to a worse than expected 5.2 per cent in September, Britain’s cost of living is now rising at the fastest rate of any EU country, except Estonia.

The comparison was helpfully provided yesterday by the opposition Labour party as government data showed consumer price inflation (CPI) hit a three-year high last month. The figure – up from 4.5 per cent in August – came as a nasty shock.

Although economists knew fuel bills would push the figure higher, most had expected it to stay just shy of the 5 per cent level for another month at least.

The Office for Budgetary Responsibility, the independent body whose forecasts are used by the treasury, had been predicting September inflation of 4.3 per cent. The government’s official target of 2 per cent CPI has now been left so far behind there barely seems much point in mentioning it at all. On the wider measure, the Retail Prices Index (RPI), which includes housing costs, inflation is at its highest level for 20 years, at 5.6 per cent, which was also higher than expected.

Sharp rises in petrol and gas and electric bills are the major culprits but the VAT rise at the start of the year continues to take its toll. With average earnings continuing to lag far behind, at just 1.6 per cent, this latest spike puts household budgets under even more pressure, further reducing disposable income. It also heightens the inflationary risks associated with the Bank of England’s latest £75 billion bout of quantitative easing.

There’s only one bright spot in the data, and that’s the fact that Britain’s pensioners will benefit, as the annual rise in their payments next April will be calculated on yesterday’s CPI rate. But even that piece of good news is tarnished by the fact that, in the past, benefit payments have gone up in line with the higher RPI figure, which means the increase will be 5.2 per cent rather than 5.6 per cent.

The bad news is much easier to find. Although the government is saving by the switch to CPI, the discrepancy between the inflation rate predicted by the OBR, at 4.3 per cent, and the actual figure, at 5.2 per cent, will add an extra £1.6 billion to its £207.8 billion benefits bill.

The money will have to be found somewhere and that’s bad news for the chancellor, sticking grimly to his deficit reduction plans despite fears that his strategy is ruining any remaining chance of economic recovery.

Just to complete the bad news, the UK’s Misery Index hit its highest level in almost 20 years. Calculated by adding the unemployment rate to the inflation rate, the index is now at its highest since just after Black Wednesday in 1992, when Britain exited the European Exchange Rate Mechanism.

I’m not sure what the Misery Index is in Estonia but, if it’s any comfort, we should at least be more cheerful than they are in America, where the Misery Index is currently at a 28-year peak.

* * * * *

FOR TWOcompanies that most people outside the City have never heard of, G4S and ISS certainly produce some memorable numbers. Poised to join forces via an agreed £5.2 billion bid for ISS (the Danish services provider) by G4S (the old Group Four security group) the combination of the two will create a global outsourcing giant with annual sales of £16 billion and operations in 130 countries.

The enlarged business will also be one of the biggest employers in the world, with its 1.2 million-strong workforce second among private sector employers only to the giant Wal-Mart group.

Given the high turnover rate in its areas of operation – office cleaning, security guards and catering staff - the group will need to recruit an astonishing 35,000 new staff each month simply to stand still.

There was another big number when the bid, the largest by a UK listed company this year, was announced on Monday – a 22 per cent fall in G4S’s share price. The ambitious takeover move is being financed by debt and a hefty £2 billion rights issue, so the fall in its shares is perhaps understandable.

But although the strategy behind the combination of the two companies was broadly accepted by analysts, there was distinct nervousness about the sheer scale of the deal. G4S has a good track record on takeovers but integrating its business with ISS will be a huge task.

Fiona Walsh writes for the

Guardian

newspaper in London