Inflation surged to its highest level for more than five years last month, increasing the financial pressure on households and boosting the prospect of an interest rate hike.
Figures from the Office for National Statistics (ONS) showed the Consumer Price Index (CPI) measure of inflation reached 3% in September, rising in line with expectations from 2.9% in August.
The step-up in CPI was driven by higher food and transport costs, pushing the headline rate to levels not seen since April 2012.
Dr Esmond Birnie, senior economist at the Ulster University Economic Policy Centre, said the shift was not good news.
“It is now well past the Bank of England’s Monetary Policy Committee (MPC) target of 2%. The extent to which many families are suffering declines in their real living standards will increase.” British pensioners received a lift from September’s rise, but cash-strapped households face an even tighter squeeze as the Brexit-hit pound bumps up everyday prices and wage growth tracks behind inflation.
The state pension is linked to last month’s CPI rate, meaning the amount dished out by the Government will increase by at least 3% next year.
The triple-lock on pensions ensures that recipients are guaranteed a minimum increase each year by whichever is the highest out of September’s inflation rate, average earnings or 2.5%.
Sterling was down 0.3% against the US dollar at 1.32 in early afternoon trading on Tuesday following the update, and 0.1% lower versus the euro at 1.12.
Andrew Sentance, PwC’s senior economic adviser, said: “This latest rise in inflation will add to the squeeze on the spending power of consumers and is likely to prolong the period of sluggish growth we are currently seeing here in the UK.
“A further rise in the inflation rate later this year cannot be ruled out.
“Relatively high inflation will also add to the pressure on the Bank of England Monetary Policy Committee (MPC) to raise interest rates next month.
“A gradual rise in interest rates would help support sterling and reduce the risk that the current surge in inflation becomes more prolonged and persistent.”
September’s jump in CPI placed Bank of England governor Mark Carney on the brink of having to write a letter to Philip Hammond explaining why inflation is rising so rapidly.
The Government has set an inflation target of 2%, with protocol dictating that Mr Carney must contact the Chancellor if inflation exceeds 3% or falls short of 1%.
There is growing speculation that the MPC could raise interest rates next month, particularly after minutes from its September meeting showed all policymakers believed “some withdrawal of monetary stimulus was likely to be appropriate over the coming months”.
The Retail Price Index (RPI), a separate measure of inflation used to set next year’s business rates, was unchanged last month at 3.9%.