Inflation could hit three-year high

Inflation is expected to hit a three-year high tomorrow, landing the Government with a bumper bill for increased state benefits and underlining the squeeze on household incomes.

September's consumer prices index (CPI) will be used to determine next April's rise in the basic state pension, piling pressure on the public purse but bringing some relief for hard-pressed pensioners.

Based on City forecasts for CPI of 4.9%, the basic single state pension will increase by £5 to £107.15 a week, while the joint state pension will increase by £8 to £171.35.

Employment benefits, such as Jobseeker's Allowance (JSA) and income support are also calculated using the September CPI rate, meaning the JSA could increase by £3.31 to £70.81 a week.

Next year's benefit rates are not formally unveiled until later this year and will be the first to be calculated using CPI rather than retail prices index (RPI) rate of inflation, which is expected to rise from 5.2% to 5.4% in September.

If the calculation was still based on RPI at 5.4%, the single state pension would have been £107.67 and the joint one would have been £172.17.

Dave Prentis, general secretary of Unison, said: "The move from RPI to CPI to calculate pensions inflation will take millions out of pensioners' pockets - just as we need people to be spending to kick-start our flagging economic recovery."

The increase in state benefits will put more pressure on Chancellor George Osborne, who is battling to slash the nation's budget deficit, as unemployment hits a 17-year high of 2.57 million in the three months to August.

Some economists believe that inflation could spike at 5.1% tomorrow - up from 4.5% in August - after price hikes from major energy providers, including Scottish & Southern Energy, E.ON, British Gas and Scottish Power.

The figures are unlikely to overly concern the Bank of England, which has already forecast inflation to rise to 5% this year and recently increased its quantitative easing programme in a sign that growth problems outweighed the threat inflation poses to the economy.

The inflation rate will underline the increasingly difficult conditions faced by households - after figures last week revealed weekly earnings grew at just 1.8%.

E.ON lifted electricity tariffs by 11.4% and gas by 18.1% on September 13 while SSE raised gas prices by an average of 18% and electricity prices by 11% the following day. British Gas and Scottish Power introduced their own hikes in August.

Philip Shaw, chief economist at broker Investec, expects CPI to hit 5.1%, just shy of the 5.2% reached in September 2008, as the utility hikes alone add 0.4% to inflation.

He said: "September should be a nasty month for inflation, with the CPI rate set to rise sharply from August's already elevated 4.5%.

Elsewhere, evidence from the British Retail Consortium suggests food prices remained elevated in September, despite the cost of some commodities, such as oil and corn, pulling back.

Air fares reported a hefty 28% plunge in September last year, which Mr Shaw said was unlikely to be repeated in 2011, exerting further upward pressure on overall prices.

Howard Archer, chief UK economist at IHS Global Insight, said he expects inflation to hit 4.9% in September, which would still be a three-year high.

However, Mr Archer said inflation was close to its peak.

He said: "Inflation will hopefully start edging down later this year and then fall back markedly in 2012 as the upward impact from past VAT developments, earlier jumps in energy, commodity and food prices, and sterling's past sharp depreciation wanes."

The Bank said it increased its QE programme by £75 billion to £275 billion because with economic conditions as they are, it expects inflation to drop below its 2% target in the medium term.

PA