I last wrote about inflation two months ago and this week the traditional Retail Prices Index for September rose to 5% – back where it was in July after a brief dip last month. It is seventeen years since the official rate of inflation was this high.
The Consumer Prices Index – the measure the Government has preferred since 2003 – was even higher at 5.2%. It last reached that level in March 1992. The Government has missed its 2% target for each of the last twelve months.
The good news is that many economists are telling us inflation has peaked. Oil and grain prices which have driven it up are now falling and some are saying that the worry now is not inflation but its opposite – deflation when prices fall rather than rise.
I remain to be convinced of that. But this month’s inflation cloud does have a very pale silver lining. The September RPI is the one used to calculate the rise in state pension next April. The 5% rise will boost the basic pension by £4.55 a week to £95.25. The pension for a married woman on her husband’s contributions will increase to £57.07, a rise of £2.70.
If the economists are right when they say inflation will soon start falling then by the time this rise is paid next April inflation could be a lot lower than 5%.
That will be scant comfort of course for people struggling to pay higher fuel and food bills this winter. Research out this week by the Institute for Fiscal Studies shows that single pensioners have an inflation rate of more than 9% and that pensioners living in couples face inflation of 7.7%. That is because older people spend a much bigger proportion of their income on food – up by 11.2% over the last year – and household fuel which rose by 39.6% over the last year.
And it is bad news for the Chancellor and for taxpayers. The rise in the pension alone will cost more than £3 billion in 2008/09. Raising child benefit, tax credits, and benefits for unemployed people, single parents and those with disabilities could boost that cost to almost £9 billion, which is £3 billion more than Alistair Darling expected when he last did his sums in March.
Of course, the cost of putting up benefits pales into insignificance compared with the £500 billion set aside to help the High Street banks out of their current crisis. But it is big enough to give the Chancellor another small headache as he prepares his Pre-Budget report which is due sometime next month. Whether it is by spending less, raising taxes, or borrowing more the extra money will have to be found.
Go back to Paul Lewis front page