UK inflation rose

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 raise interest rates to bring down prices. Food prices rose by 14.5 per cent compared to last year's last month. If the Government decides to uprate benefits by inflation, this is the percentage they will be increased by, which will come into effect from next April. The Government also uses September's inflation figure within the triple-lock pension commitment.

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. 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 primary measure of inflation, has been offset by the rising cost of food. The inflation rate, slightly above economists' expectations of 10 per cent, will also be used to decide the property tax increase facing high street firms.

Prices are rising at their fastest rate in decades and have reached five times the Bank of England's 2 per cent target. As a result, the central bank has raised interest rates six consecutive times, from a record low of 0.1 per cent last December to their current level of 2.25 per cent. For this reason, 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 whole 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. Hence, 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».

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