High inflation is officially A Good Thing
It’s official. The September rates of inflation have been published and they are laughing in the face of the Bank of England’s 2% target. The Consumer Prices Index (CPI) is up to 5.2%, the highest it has ever been since its introduction in 1997, and the traditionally higher Retail Prices Index (RPI), which includes housing costs, is now a whopping 5.6%. However, inflation being high is not really news any more, but September’s inflation measures in particular have something of a double edged sword about them. We may not like high inflation most of the time, but in September, we really, really do.
The reason for this duplicity is that September’s CPI figures are the ones used by the Government in setting increases for next April. This means that although pensioners may be the hardest hit by things like increased energy prices, they now know that their State Pension will go up by 5.2% in April to a total of £107.46 a week ( a single person, collecting their full entitlement).
Similarly, certain benefits, such as child benefit, child tax credit, maternity and disability benefits, plus jobseekers’ allowance and income support will also benefit from the over 5% increase, which is more than many employees can expect.
Tax also changes according to September’s inflation. Like benefits, the increase in personal allowances and tax rate bands used to be tied to the higher RPI but is now linked to CPI. Unless a Spring budget makes specific changes, these amounts will also increase by 5.2% in April 2012. Tax-free ISAs will increase from £10,680 to £11,280 next year , with the cash limits half of these amounts.
While any increase in benefits and tax-free amounts will undoubtedly be welcomed, even if it is on the back of a higher cost of living, the inflation measures include a wide range of consumables and some things have inflated at a higher rate than others. As mentioned above, pensioners whose main household expense may be heating costs could lose out disproportionately.
The Office for National Statistics, which released the data, said in a statement: "By far the largest upward pressure to the change in CPI... came from increases in gas and electricity charges.” Bills for gas and electricity have risen on average 9.9% in the past month, and are up 18.3% on the year.
But the energy companies could actually have done (the rest of) us a favour. Despite the higher-than-expected rise in CPI, many economists agree with the Bank of England that inflation has probably reached a peak and may soon start to fall.
"The September figure should represent a peak in the rate of inflation," Markit chief economist Chris Williamson told the BBC.
This means that, for once, the market has worked in our favour and we should all benefit next April from the highest possible increase, while the cost of living should fall.
Here’s to 2012.