Britain’s inflation rate is expected to have accelerated in September as surging fuel costs and mounting energy pressures threaten to deepen the squeeze on household finances heading into winter.
Consumer prices index (CPI) inflation is forecast to have risen to 3.4 per cent from 3.1 per cent in August, according to a consensus estimate compiled by Pantheon Macroeconomics. The Office for National Statistics is due to publish the official figures on Wednesday.
The expected increase would leave inflation well above the Bank of England’s 2 per cent target, underscoring the challenge facing policymakers as international energy pressures feed through into domestic prices.
Higher motor fuel costs are expected to have been a major contributor to September’s increase, according to Pantheon economists Rob Wood and Elliott Jordan-Doak. Diesel prices have been particularly striking, with average prices surpassing £2 a litre at the beginning of October for the first time, according to RAC figures.
The rise threatens to spread beyond the forecourt. Higher transport and distribution costs can put additional pressure on businesses already contending with elevated operating expenses, potentially feeding through into the prices paid by consumers.
Other temporary factors may also have pushed inflation higher. Pantheon’s economists expect prices at family attractions, including theme parks and zoos, to have risen after a temporary summer VAT reduction ended in September.
The broader concern is that the latest inflationary pressures could persist just as households prepare for colder weather and higher heating bills.
Sanjay Raja, chief UK economist at Deutsche Bank, said food price increases had so far been restrained by “fierce” competition between supermarkets seeking to keep prices down. But that protection could weaken as higher energy costs and extreme weather begin to affect supply chains and household shopping baskets.
The outlook for household energy bills adds another source of pressure. An increase in Ofgem’s energy price cap took effect at the beginning of October, raising the prospect of higher bills for dual-fuel households over the winter months.
For families already struggling with the cost of essentials, the combination of more expensive fuel, heating and food threatens to leave less money available for discretionary spending. The International Monetary Fund has warned that cost-of-living shocks fall disproportionately on poorer households, which spend a greater share of their income on necessities.
September’s inflation reading also has implications extending well beyond monetary policy. It is typically used to determine annual uprating for several benefits, including universal credit and disability benefits, making the figure particularly significant for households dependent on state support.
The same inflation measure is one component of the pension triple lock, which determines annual increases in the state pension. Under the mechanism, pensions rise by whichever is highest: inflation, average earnings growth or 2.5 per cent.
However, published earnings figures already point to wage growth of 3.9 per cent, making that the widely expected basis for next April’s state pension increase, assuming no change in the applicable rules.
The impending figures therefore present a difficult picture for the British economy. Higher inflation may translate into larger benefit payments and pension increases, but it also threatens to prolong the pressure on living standards and complicate the Bank of England’s efforts to return inflation sustainably to target.
For households, the immediate question is whether the latest price shock proves temporary or becomes another sustained assault on purchasing power just as winter begins.
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