5.2%: Inflation equals record high

The rate of consumer prices index (CPI) inflation in September, which is used to determine next April’s rise in state benefits, rose from 4.5% to 5.2%, which equals the record high reached in September 2008, the Office for National Statistics (ONS) said.

Next year’s benefit rates are not formally unveiled until later this year, but this means the basic single state pension will increase by £5.31 to £107.46 a week, while the joint state pension will increase by £8.49 to £171.84.

Employment benefits, such as jobseeker’s allowance (JSA) and income support are also calculated using the September CPI rate, meaning JSA will increase by £3.51 to £71.01 a week.

The higher-than-expected surge was driven by a jump in utility bills, as gas and electricity increased 13% and 7.5% respectively following price hikes from major energy providers, including Scottish & Southern Energy, E.ON, British Gas and Scottish Power.

Sir Mervyn King, governor of the Bank of England, which is tasked with keeping inflation down, is expected to mount a strong defence of the Bank’s handling of the economic crisis in a keynote speech tonight.

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 hit a 17-year high of 2.57 million in the three months to August.

It will be the first time the uprating in benefits is calculated using CPI rather than the retail prices index (RPI) rate of inflation, which rose from 5.2% to 5.6% in September, which is the highest rate in 20 years.

If the calculation was still based on RPI, the single state pension would have been £108.42 and the joint one would have been £173.36.

The CPI inflation rate also underlines the increasing squeeze on household incomes after figures last week revealed weekly earnings grew at just 1.8%.

Housing, water, electricity, gas and other fuels increased 8.6%, the highest increase in two-and-a-half years, the ONS said.

E.ON raised electricity tariffs by 11.4% and gas by 18.1% on September 13 while SSE put up 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.

The ONS warned there would be further pressure from utility bills in October’s figures as price hikes from EDF and Npower are introduced.

Energy firm bosses agreed a number of measures yesterday aimed at reducing household energy bills after a summit meeting at which David Cameron told them action was “absolutely vital”.

Millions of customers will receive letters offering advice on how to reduce costs by switching to different payment methods and taking advantage of free or subsidised insulation.

A Treasury spokesman said: “The Government is taking action to help consumers with current high costs, including cutting fuel duty and freezing council tax, and the Prime Minister met yesterday with energy suppliers to discuss how to bring down customers’ energy bills.”

Elsewhere, consumers were facing pressure from a record increase in communication costs, up 0.9%, which was driven by charges from mobile phones and cable telephones.

Air fares reported a 21% drop, but this compared to a larger 28% plunge last September, so this exerted further upward pressure on overall prices.

Elsewhere, restaurant and hotel bills hit a record high, increasing 4.7%.

The only downward pressure came from clothing prices, which rose 4.4% compared to a 6.4% record surge last year.

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 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.

Sir Mervyn will deliver his speech at 8pm as part of the Monetary Policy Committee’s visit to the north west of England.

Downing Street confirmed that it was the usual procedure for September’s inflation rate to be used to determine the uprating of benefit and pension levels.

But the Prime Minister’s official spokesman said it was a decision for the Chancellor each year whether to continue to apply this procedure.

“The process on this is that the September figures are usually used for uprating benefits, but the final decision on that is something that happens in the autumn statement,” said the spokesman.

“It is standard procedure (to use the September figure) but it is also standard procedure that the decision is taken at the Pre-Budget Report, under the previous government, or in the autumn statement under this Government.”

Mr Osborne is due to deliver his autumn statement to the House of Commons on November 29.

Asked for David Cameron’s response to the latest inflation figures, the PM’s spokesman said: “We understand it is a difficult time for households who are affected by these price rises, which reflect what is happening to global oil and gas prices.”

The spokesman was challenged at a daily media briefing in Westminster over whether the Bank of England was right to pursue a loose monetary policy by printing money at a time of high inflation.

The PM’s spokesman said: “On the question of quantitative easing, the decision to loosen monetary policy is a decision for the Bank of England, something that they make a judgment on based on their assessment of inflation and what is likely to happen to inflation in the future.

“The governor was explaining after that decision that they expect inflation to come down considerably in the coming months. The Bank of England assessment is that what we are seeing with inflation reflects what we are seeing in global commodity markets.”