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Inflation set to hit 3% after shock increase in October

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Inflation set to hit 3% after shock increase in October

Inflation shot to a five-month high in October as the trebling in university fees and rising food prices forced up the cost of living.

Figures from the Office for National Statistics (ONS) showed annual consumer price inflation leaped to 2.7% from 2.2% in September, way ahead of economists’ forecasts.

The main factor in the shock rise was the controversial increase in maximum university tuition fees. These have risen to £9,000 a year from just over £3,000, a move that on its own added 0.3 percentage points to the inflation rate.

Higher food prices, exacerbated by the rainy weather spoiling the potato crop and pushing up the price of the staple vegetable, were also to blame, said ONS.

The Treasury said the rise in inflation was ‘disappointing’ as experts predicted inflation would rise above 3% as higher energy bills hit households later this year.

Len McCluskey, general secretary of Unite, the union, said: 'We are in a desperate situation where millions of working people and their families are juggling rising food and energy bills when household incomes for the majority of people have not kept pace in recent years. Where families lead in suffering, shops and businesses will follow.'

Chris Williamson, chief economist at Markit, the financial data provider, said consumers were unlikely to see CPI reach its 34-month low in September for some time. ‘The Bank of England's updated growth and inflation forecasts, due tomorrow, are likely to show that inflation will rise further in coming months, due largely to higher energy and food prices.

‘The Bank's current estimate that inflation will fall below its 2% goal by the end of 2013 is looking somewhat optimistic as a result,’ said Williamson.

David Kern, chief economist of the British Chambers of Commerce, urged the Bank of England not to extend its ‘quantitative easing’ or money printing programme, which is widely viewed as inflationary.

So far the Bank has pumped £375 billion of new money in to the economy in the past three years. Last week it refrained from announcing a further increase in QE although it did say it would transfer up to £35 billion of cash from the scheme to the Treasury.

Kern said: ‘Higher inflation is unwelcome news for the UK economy at a time when the government is persevering with its tough austerity plan. In the face of major economic challenges, there is only limited scope for the UK to rebalance towards exports and investment over the next year. In these circumstances, the boost to real incomes resulting from low inflation could be one of the main factors for underpinning domestic demand in 2013.

Rising inflation is bad news for savers and pensioners. Moneyfacts, the financial products data provider, said there were only 40 standard savings accounts and ISAs offering a rate of 3.37% or above that would allow savers paying the basic 20% rate of tax to beat inflation.

There are no accounts or ISAs that help higher tax payers on 40% generate a 4.5% return that would beat inflation after tax.

Charlotte Nelson, finance expert for Moneyfacts, said: ‘Best buy savings deals are being pulled left, right and centre so it is imperative for savers to act fast to take up the best rates, before the market evens out.’

Tom McPhail, head of pension research at Hargreaves Lansdown, called on the ONS to produce an inflation index specifically for pensioners. Pensioners typically experience a higher rate of inflation than the rest of the population because they spend more of their money on food and heating, he said. As a result, he argued it was unfair to link their pensions to the main rate of inflation.

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