Member Article

Inflation at lowest for three years

Inflation has fallen to 2.2% in September, down from 2.5% in August, the latest Consumer Price Index shows.

The figures from the Office for National Statistics show it is the lowest level of inflation for nearly three years.

Major downward pressures came from falling prices in the housing and household services sector, while the significant upward pressures included transport, recreation and culture, and miscellaneous goods and services sectors.

Impending energy prices rises from four of the “big six” providers are expected to push inflation higher, as are forecast rises in food prices caused by global droughts.

TUC General Secretary Brendan Barber said: “This fall in inflation is welcome. However, these figures should be seen in the continuing real wage falls, which have meant families getting poorer every month for the last three years.

“Low-paid households will continue to feel the squeeze, especially with the new hike in energy prices that will see bills increase by as much as nine per cent.When you factor in plans to freeze benefits many families will still be under immense pressure to make ends meet.”

Graeme Leach, Chief Economist at the Institute of Directors, said:“The fall in the headline rate of inflation to a three-year low in September is clearly positive news, as last year’s utility bill rises fall out of the figures.

“Unfortunately, the main reasons for falling inflation are persistently weak growth and a lack of money moving about in the economy. In the short-term, low growth in the money supply should continue to dampen inflation. However, as the energy companies have announced another round of price hikes recently, we may well see another tick upwards soon.”

Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, added: “Another step in the right direction, although the fact that inflation fell has as much to do with base effects – arising from the big energy-related pick-up in inflation last September – as anything that happened last month. It’s also a rare piece of good news for the Chancellor, who will now be up-rating benefits by less than half of last year’s increase.

“In the short-term this is likely to be as good as it gets on inflation. Producer output prices have started to pick up again which, combined with the prospect of rising energy, fuel and food prices, is likely to nudge inflation upwards again over the next couple of months. However, this will still represent much weaker inflationary pressures than those seen for much of the past five years, meaning that with employment increasing as well, the squeeze on hard-pressed consumers is probably over.

“Furthermore, we expect inflation to drop back again over the early part of next year as oil and food prices come back under control. We are forecasting CPI inflation of 2.1% in 2013, which would be the lowest rate for eight years. We have seen some early evidence of a consumer recovery in recent months and lower inflation should boost households’ spending power and generate some extra momentum. “With the current tranche of QE coming to an end in the next few weeks, today’s figures will give the MPC extra leeway to expand the scheme further, should they wish to. Clearly they expect the Funding for Lending Scheme to do a lot of the work, but it would be a surprise if they decided against a further expansion of QE to provide further insurance.”

The September CPI is frequently used to calculate rises across state benefits, and there is speculation as to how the Chancellor will use the figures in line with his drive to “make work pay.”

Commenting earlier last week, IPPR Director Nick Pearce, said: “Where will the Chancellor get £10 billion in welfare cuts? He has all but confirmed that housing benefit will be withdrawn from under-25s, although it is impossible to see how that could extend to homeless families with children, and therefore that the putative savings of £1.8 billion could materialise entirely from that source. Likewise, it isn’t obvious that huge sums can be generated by restricting child benefit or child tax credits for workless families who have more than three children. That’s just straightforward right-wing populism of the ‘welfare queen’ variety.

“So it now seems very likely that the Chancellor will uprate those non-pensioner benefits that are not already frozen to average earnings for 2013/14, rather than to the consumer price inflation (CPI). Earnings growth has been weak this year, and using the relevant three-month average figure to July 2012 would mean benefits are uprated by 1.5 per cent, rather than the 2.5 per cent expected level of CPI.

“This might not look like much, but it will be applied to a baseline of some £50 billion of spending, depending on how wide the Chancellor casts his net, and the new baseline will then be lower for the uprating in subsequent years – such that, by 2016/17, the Government will be making quite large benefit savings. This kind of fiscal drag for the poor is a favourite Treasury manoeuvre to cut social security spending.”

This was posted in Bdaily's Members' News section by Tom Keighley .