Inflation has risen once again as consumers continue to battle against rising food and transport costs, according to the Office for National Statistics (ONS).
The consumer prices index (CPI) measure of inflation rose from 2.9% in August to 3% in the year to September 2017, while the consumer prices index including owner occupiers’ housing costs (CPI-H) was 2.8% in September, up from 2.7% in August.
This is the highest rate of both CPI and CPI-H inflation recorded since March 2012.
Inflation is also significantly higher than the Bank of England’s 2% target. This will only add to the pressure on the central bank to raise interest rates. The next base rate decision will be announced on Thursday 2 November 2017.
The retail prices index (RPI) measure of inflation, which is no longer a designated national statistic but which is still used to calculate certain financial increases such as student loan interest rates and rail fares, remained at 3.9% in the year to September 2017.
Laith Khalaf, senior analyst at Hargreaves Lansdown, says: “The pound in your pocket is depreciating, as the rising price of goods continues to chip away at its value.
“The tick upwards in inflation will increase expectations of a rate rise from the Bank of England later on this year, stoked by a flurry of hawkish rhetoric coming from Threadneedle Street.
“This wouldn’t be the first time the bank has talked the talk without walking the walk however, so it’s probably best not to count those chickens until they’re hatched.”
‘Retirees the biggest winners from today’s inflation figure’
But today’s inflation figures may be good news for those in receipt of the state pension. Maike Currie, investment director for personal investing at Fidelity International, explains: “It’s also worth noting that September’s inflation figure matters hugely to both retirees and savers. Under the government’s ‘triple lock’ guarantee, the state pension will rise in April each year by whichever number is the highest out of the September CPI inflation number, average earnings or 2.5%.
“With inflation running higher than either wages or 2.5%, this will determine the rise in the state pension next year, arguably making retirees the biggest winners from today’s inflation figure.”
Kate Smith, head of pensions at Aegon adds: “Today’s figures mean that weekly state pension payouts will rise from £159.55 to £164.37. This means that people will see their annual state pension income rise by £250. However, those on the old basic state pension will only see their state pension increase from £122.30 to £125.97 a week, giving an annual increase of only £191.”
She continues: “This month’s inflation figures are also uniquely important because they are used by the government to calculate the rise in the Lifetime Allowance (LTA) for private pensions for the first time. The increase for the LTA in 2018/19 will be £1,030,000 based on today’s figures [up from £1,000,000], and following a series of reductions it is welcome that the base-level is set to start growing again, even if on the surface the numbers aren’t large.”
Low income families struggling with high inflation
But at the other end of the scale, analysis by Tilney shows that low income families are being hit particularly hard by high levels of inflation. Those in the bottom 10% of earners have been disproportionately affected by the rise in food costs and other essential items.
The rising cost of utility bills has also had an impact, with this group spending a higher proportion of their income on utilities than any other demographic.
Some ‘big ticket’ items - such as new cars - have fallen in price over the last two decades. However, these savings have largely benefited middle and high income households, who are more likely to buy new vehicles.