Inflation leaps to record high

Posted on October 18th, 2011 | Categories - News

Inflation rises to record highThe Consumer Prices Index (CPI) rose to a record high last month as energy prices rose.

CPI rose from 4.5% in August to 5.2% in September, the highest level since September 2008. CPI has never been higher than 5.2% since it’s’ introduction in 1997.

The Retail Prices Index (RPI), which is calculated differently and includes mortgage interest payments, rose from 5.2% in August to 5.6%, the highest level since June 1991.

Energy costs

The Office for National Statistics (ONS) who produce the figures said: “By far the largest upward pressure to the change in CPI… came from increases in gas and electricity charges.”

The ONS continued: “There were also large upward pressures from air transport and communication services.”

Gas and electricity bills have risen by 9.9% in the past month and a massive 18.3% during the past year.

Other rises came from transport, up 12.8% over the past year and food, up 6%.

Target

The latest inflation figures are more than double the Bank of England’s target which is set at 2% for CPI.

Despite the rise the Bank still believes that inflation will fall back towards target in the “medium” term as this year’s VAT increase falls out of the calculations and low levels of wage inflation along with subdued demand filter into the economy.

Despite some scepticism earlier in the year over the Bank’s insistence that inflation would fall back towards 2% more economists now seem to agree with the Bank.

Chris Williamson, chief economist at Markit said: “The September figure should represent a peak in the rate of inflation.”

Howard Archer, of IHS Global Insight, agrees “Consumer price inflation could very well be down near to the Bank of England’s target level of 2% by the end of 2012, and it could very well dip below this level in 2013.”

He continued: “Much will obviously depend on oil price developments.”

State benefits

September’s inflation numbers are crucial to many as they will be used to set the rise in a number of state benefits, which for the first time will be pegged to CPI and not RPI.

The basic state pension, job seekers allowance, income support, disability, maternity and incapacity benefits are among those which will all rise next April in line with CPI.

Such a large rise will put more pressure on the Treasury as the battle to reduce the budget deficit.

Individual Savings Accounts

It is not just state benefits which will rise in line with September’s CPI figure. The annual ISA (Individual Savings Account) allowance will rise from April to £11,280.

Other income tax, capital gains tax and inheritance tax allowances will also rise in line with September’s CPI figure.

Savers, including those with ISAs, will be dismayed by the latest inflation figures, it is now impossible for a tax payer to find a rate of return sufficient for their savings to keep pace with both CPI and RPI.