Living standards to be hit as inflation rises to five year high

Written by Nicholas Mairs and Jenni Davidson on 17 October 2017 in News

Inflation increased to three per cent in September, according to ONS figures published today

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Living standards of low and middle income families will be dealt a blow as inflation hits a five-year high, the Resolution Foundation has warned.

Inflation reached three per cent in September for the first time since March 2012, according to Office for National Statistics (ONS) figures published today.

Analysis by the Resolution Foundation found that a working family with two children will lose out on £315 a year.

Because of the current benefits freeze, it also means that benefits such as tax credits, child benefit, JSA, ESA and Universal Credit are subject to a three per cent cut in real terms.


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Rising food prices and transport costs are the main factors behind the rise in the Consumer Price Index from 2.9 per cent in August.

Overall, food prices went up by 0.8 per cent between August and September 2017, compared with a 0.4 per cent fall last year, climbing at the highest rate since October 2013.

Computer games, a change in the way the ONS accounts for air fares, and an increase in fuel prices also contributed to the rise.

Clothing costs, however, which rose by less than they did a year ago, had a downward effect on the figures.

The trend, which is well above the two per cent Bank of England target, will further fuel expectation of an increase in interest rates next month.

The CPIH measure, which also includes housing, reached 2.8 per cent in September – a level not exceeded since March 2012. 

The Institute for Fiscal Studies said the figure highlighted the risk of setting benefits rates far in advance, with recipients set to lose out as an unintended consequence.

“This morning’s inflation figure, taken together with the latest inflation forecasts, means that the four-year freeze on most working-age benefits is now expected to cut the benefits of 10 million families by £450 a year in real terms – up from £320 back when the freeze was first announced.

“The extra £130 loss is not the result of any deliberate decision by the government – it is the consequence of inflation being higher than was expected when the policy was set.”

Senior economic analyst at the Resolution Foundation David Finch said the figures demonstrated the need for Chancellor Philip Hammond to unfreeze working age benefits.

“Rising inflation is dealing a double living standards blow to families on low and middle incomes, who are facing shrinking pay packets and reduced state support,” he said.

“But rather than addressing the squeeze, government policy is making things worse by freezing benefits at a time when inflation is almost three per cent.”

SNP Economy spokesperson, Kirsty Blackman MP said: “Tory extreme Brexit plans are already hitting families and businesses across the country, and rising inflation will squeeze tight household budgets even further as prices rise while incomes fall.
 
“The Chancellor must use the November budget to deliver real help for hard-pressed families by scrapping the cap on public sector pay, tackling the wages crisis, and supporting those on benefits, to prevent even more low income families being driven into poverty, debt and destitution.

“As Brexit continues to drive up the cost of living, and impact across the economy, the UK government must commit to protecting our vital membership of the single market and customs union to avoid further devastation to jobs, incomes, and businesses.”

A spokesperson from the Treasury said: "We understand that families are feeling the effects of inflation and we are helping them with their living costs.

“We've frozen fuel duty, doubled free childcare for nearly 400,000 working parents and cut income tax for 30 million people. Increases to the National Living Wage are also delivering the fastest pay rise for the lowest paid in 20 years.

Scottish Chambers of Commerce called for the Monetary Policy Committee (MPC) to resist calls for a rise in interest rates and for measures to increase business confidence.

Scottish Chambers of Commerce CEO Liz Cameron said: “The figures today continue to highlight the divergence between cost of living and real wages which characterises the fragility of the UK economy.  

“Speculation continues to increase around the prospect of an interest rates rise in November, yet the inflation figures emphasise the uncertainty this would cause to both Scottish business and the UK economy as a whole.

“In the current climate, while real wages are falling, the MPC should continue to hold steady on interest rates.

“It is critical that the measures provided in the Chancellor’s upcoming Autumn Budget are clearly designed to boost business confidence and increase investment. 

“Ensuring a stable environment for business growth will contribute to rising wages, and a subsequent rise in consumer confidence.”

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