Inflation has hit an historic high, largely caused by the dramatic rise in water, gas and electricity costs.
 
Figures from the Office of National Statistics (ONS) show that the Consumer Price Index (CPI), the figure normally quoted for inflation, rose to 5.2 per cent in September from 4.5 per cent in August, a joint historic high with September 2008.

The Retail Prices Index (RPI), used to measure index-linked bonds and for pensions and state benefits, reached 5.6 per cent from 5.2 per cent, the highest figure since June 1991.

Electricity prices have risen 7.5 per cent, while gas has shot up 13 per cent. Clothing and footwear prices and food and non-alcoholic beverages have also contributed to the rise, up 4.4 per cent and 6.4 per cent respectively.

The figures are bad news for households struggling to tighten their belts and for an economy in need of consumers spending disposable income, but are a mixed blessing for investors.

Paul Mumford, senior fund manager at Cavendish Asset Management, claimed that ‘inflationary pressures can carry a silver lining for equities’.

He explained, ‘With inflation now running at over five per cent, eroding the capital value of bonds, equities are rendered yet more attractive compared to fixed income assets, which at current are struggling to provide investors with decent income.’

Mumford cited the increase in equity dividends as making them a more attractive prospect, with recent research by Capita Registrars showing a 16 per cent year-on-year increase in equity dividends in the third quarter this year.

The CPI rate, which has only been measured since 1997, was considerably higher than the 4.9 per cent City analysts had expected.

The level of inflation means that 20 per cent of taxpayers will need to find a savings account offering 6.5 per cent to beat inflation, while those paying the 40 per cent rate will need 8.67 per cent.

‘Today’s news offers absolutely no hope for anyone relying on savings interest to help pay for rising food and fuel bills,’ said Moneyfacts spokesperson Sylvia Waycot.

‘The rate of inflation means hundreds of thousands of savers need accounts paying an unattainable 6.5 per cent before they earn a real rate of return on their money.’

Azad Zangana, European economist at Schroders, said the figures call into question the Bank of England’s (BoE) economic strategy.

‘With the BoE now resuming its Quantitative Easing (QE) programme, we wonder how far the bank can push before it loses its credibility as an inflation fighter,’ he said.

Zangana said he expected the BoE to downplay the results, due to their belief that VAT was temporarily distorting the figures, and to embark on more QE in February 2012.