Commentary: Doing their bit for inflation

Ofgas and its fellow regulators have been doing their bit in the battle against inflation. Utility companies now exert downward pressure on inflation because the regulators are demanding that they hold increases in their charges below the rise in prices in the rest of the economy.

British Gas's announcement yesterday that its bills are to be cut by 2 per cent in October - under pressure from Ofgas - will not do much in itself to slow the rate of inflation. But it is another nudge in the right direction.

Gas prices account for 1.8 per cent of the retail price index, - the basket of goods and services consumed by the average family from which inflation is calculated. In June gas prices were, on average, 1 per cent higher than a year ago. October's reduction will reduce the RPI by about 0.04 per cent.

Utility and other administered prices (like rail fares) account for more than 6 per cent of the overall RPI. Economists at Midland Montagu estimate that the inflation rate for these prices was 3.3 per cent in the year to July, lower than the headline inflation rate of 3.7 per cent. A year ago utility inflation was 10.4 per cent, nearly twice the headline figure of 5.5 per cent.

The RPI-X formulae imply a virtuous circle. Lower inflation produces lower utility price increases, and lower utility price increases produce lower inflation.

The continued recession means that there is little inflationary pressure elsewhere in the economy. If interest rates have to be raised to defend the pound this will clearly increase the headline rate via higher mortgage payments. But the effect is likely to prove short-lived, not least because any further prolongation of the recession may slow pay settlements decisively below 4 per cent. Either way, the Treasury is on track to meet its Budget target of 3.75 per cent inflation in the fourth quarter, with a further fall later.