UK Inflation soars to higher than expected 10.1%

Inflation rose higher than expected to 10.1 per cent in September from 9.9 per cent in August, adding pressure to the Bank of England to continue raising interest rates to bring down prices.

Darren Morgan, director of economic statistics at the Office for National Statistics, said: “The rise was driven by further increases across food, which saw its largest annual rise in over 40 years, while hotel prices also increased, after falling this time last year.”

Food prices rose by 14.5 per cent compared with the same month last year. This was partly offset by lower petrol prices.

September’s consumer prices index (CPI) rate will be used as part of the Work and Pensions Secretary’s annual benefits uprating review. If the Government decides to uprate benefits by inflation, this is the percentage they will be increased by, this will come into effect from next April.

September’s inflation figure is also used by the government within the triple-lock pension commitment. The triple-lock means pensions will rise by the highest of three figures: average earnings, CPI inflation based on September’s rate or 2.5 per cent.

With average earnings most recently hitting 5.4 per cent, it is widely expected that pensions would rise by the inflation rate in April next year.

However, on Tuesday, Downing Street indicated ministers could ditch their commitment to the triple lock as new Chancellor Jeremy Hunt looks for more cuts to fill the Government’s financial black hole.

Following the inflation data, Jeremy Hunt said the government “will prioritise help for the most vulnerable while delivering wider economic stability and driving long-term growth that will help everyone.”

The impact of falling oil prices on CPI, the main measure of inflation, has been offset by the rising price of food. The price of imports and supplies from producers continued to rise in September, with supermarket indexes suggesting that retailers are passing the costs on to consumers through higher prices.

The inflation rate, which is slightly above economists’ expectations of 10 per cent, will also be used to decide the property tax increase facing high street firms. Business rates are now expected to increase by around £2.7 billion in April for companies in England without government intervention.

Prices are rising at their fastest rate in decades, and have reached five times the Bank of England’s 2 per cent target. The central bank has raised interest rates six consecutive times, taking them from a record low of 0.1 per cent last December to their current level of 2.25 per cent. The next meeting of its rate-setting committee is scheduled for November 3.

Andrew Bailey, the governor, warned on Friday that interest rates would have to rise faster than previously expected in order to tackle inflation caused by the government’s tax cuts. Most of those tax cuts were reversed the following Monday under the new chancellor, Jeremy Hunt, with tens of billions of pounds worth of spending cuts expected in his medium-term fiscal plan on October 31.

Financial markets are pricing in a 74 per cent chance that the Bank of England’s monetary policy committee will raise interest rates by a full percentage point to 3.25 per cent, and a 26 per cent chance that rates will rise by 0.75 percentage points to 3 per cent.

Investors expect interest rates to peak at 5.3 per cent next Spring, but many economists predict that the central bank will stop raising rates sooner as high energy prices hit demand and unemployment starts to rise.

Paul Dales, chief UK economist at the Capital Economics consultancy, said inflation has not yet reached its peak, with CPI expected to climb to 10.5 per cent in October to account for the 27 per cent rise in energy bills and up to 11 per cent in next April following the government U-turn on its energy price guarantee. “The early end to the price cap means the average inflation rate next year is more likely to be 9 per cent rather than 6 per cent,” he said.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, another consultancy, said the Bank of England’s rate-setting committee “will be more worried about the hit to consumer demand resulting from the removal of the energy price guarantee and the associated downward impact on domestically-generated inflation, than about the risk that its removal could boost inflation expectations.”

He added: “The unemployment rate likely will have risen significantly by next April, reducing the chances of a feedback loop forming between inflation expectations and realised inflation.”