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CPI inflation rise to over 5 percent

The Momentum UK Team 24 October 2011

Rising gas and electricity bills have been blamed for a large part of the high in Consumer Price Index (CPI) inflation. The rate of inflation as measured by the CPI has risen to 5.2% in the month of September, from 4.5% in August, according to recently released figures from the Office for National Statistics.

The Bank of England target rate for inflation stands at 2% for 2011. CPI is currently on a par with its highest level since its inception in 1997 and has only once before reached such a high, in September 2008.

Inflation measures the price change of everyday living taking into account the cost of services and goods over a period of time. Higher rates of inflation effectively reduce the spending power of a unit of currency and can cause problems when income does not rise concurrently. This means that pensioners, and others with more fixed incomes are most likely to feel the pinch.

Pensioners will be hit particularly hard by the sharp rise in gas and electricity bills. The reduced spending power of pensions, coupled with the rise in utility rates could make this a tough winter for many pensioners and other poorer sections of society, who tend to spend a greater proportion of income on these services.

It may come as small consolation, but the rise in inflation for September could mean that benefits are likely to rise next year. Many benefits rates are set by the September rate of inflation, including national insurance, state pensions, Inheritance Tax Allowance and Jobseekers' Allowance, which means that these benefits are likely to see a rise when the next budget is delivered in April 2012, potentially brining a slight ease in pressure on many household incomes.

Savers not lucky enough to have savings deposited in an inflation linked savings account are likely to suffer too. With a combination of very low interest rates and high level of inflation many savers are facing the double blow of failing to accrue very much interest while at the same time having the capital itself devalue.

It's not bad news for everyone though, and the situation does look set to improve again after what may be a end to the year for some. Many economists predict that inflation has reached or is coming to a peak, and that by next year we should start seeing rates fall again.

According to Mervyn King, Governer of the Bank of England, inflation "is likely to be at or close to the peak, and we expect inflation now to start to fall back as indeed it did in the months following the peak in September 2008.".

Those who may benefit from the rise in inflation include individuals in debt who are likely to see the real value of the debt that they owe decrease, those with inflation linked savings, and those holding inflation linked final salary pensions.

Momentum