Poorer households set to lose £100/year as UK inflation jumps to 1%

Rising prices for clothing, hotel stays and motor fuels contributed to an increase in the UK’s inflation rate last month, the Office for National Statistics (ONS) said on Tuesday.

The Consumer Prices Index (CPI) rose by 1.0% in the year to September 2016, compared with a 0.6% rise in the year to August. It was the biggest month-on-month rise in the cost of household items in more than two years.

Last month’s inflation rate was the highest since November 2014, when it was also 1.0%.

The pound has fallen to record lows since June, when the country voted to leave the European Union. Although this will increase the price of imported goods, the ONS said there was no direct evidence that the weaker pound was increasing prices so far.

However, economists have predicted that prices will continue to go up, particularly when the fall in the pound makes food and clothing more expensive, BBC News reported.

Higher inflation will also reduce the real incomes of working age families who receive benefits and tax credits, the Institute for Fiscal Studies (IFS) warned on Tuesday.

According to the research institute, the jump in inflation will cost poorer households around £100 a year, because their benefits will not rise in line with CPI.

“In the July 2015 Budget the Government announced that, as part of its attempt to cut annual social security spending by £12bn, most working-age benefit and tax credit rates would be frozen in cash terms until March 2020,” the IFS explained. “This policy represented a significant takeaway from a large number of working age households. But it also represented a shifting of risk from the Government to benefit recipients. Previously, higher inflation was a risk to the public finances, increasing cash spending on benefits. Now the risk is borne by low-income households: unless policy changes higher inflation will reduce their real incomes.”

As a result of the freeze, 11.5 million families were expected to lose an average of £260 a year. But with inflation higher than forecast, the cost has gone up to £360.

Noting that benefits are intended to provide a minimum standard of living, the IFS said:

“While it is perfectly reasonable to argue – as the 2015 Conservative Party manifesto did – that the working age benefit system should be made less generous over this parliament, it is hard to see why the appropriate size of cut should be arbitrarily determined by the impact of movements in sterling on prices.”