State benefits for the unemployed and poor could be frozen next April as George Osborne imposes a new squeeze on the welfare budget.
But the Chancellor's controversial move has provoked a row with the Liberal Democrats, who claim it would make a nonsense of his pledge at last week's Conservative Party conference that the rich would shoulder the biggest burden of the spending cuts.
Post benefits increase each April by the rise in the consumer prices index (CPI) the previous September. Yesterday it was announced that the figure stood at 2.2 per cent last month.
It is understood that Mr Osborne is considering a one-year freeze in benefits next spring to compensate for what he regards as a generous 5.2 per cent increase in benefits in April this year, which went ahead when the Liberal Democrats joined forces with Iain Duncan Smith, the Work and Pensions Secretary, to block the Chancellor's plan for a smaller rise.
Another option being studied by the Treasury is to raise benefits in line with the rise in average earnings, currently 1.4 per cent.
A decision on next April's benefit uprating will be announced by Mr Osborne in his autumn statement on 5 December. Nick Clegg, the Deputy Prime Minister, will negotiate with the Chancellor ahead of the statement and is expected to argue for most benefits to rise in line with the CPI. The Lib Dem leader has repeatedly declared that the nation's books should not be balanced on the backs of the poor and vulnerable.
The basic state pension will not be affected by the Treasury's plan to claw back next year's rise. It will rise by 2.5 per cent under the Coalition's "triple lock" mechanism, which means it increases by either the CPI, average earnings or 2.5 per cent, whichever is higher. That would take the basic payment for a single pensioner from £107.45 to £110.13 a week and for a couple from £171.85 to £176.14 a week.
But campaign groups said the increase would have been higher if the Government had used the retail prices index (RPI), which rose by 2.6 per cent last month.
Dot Gibson, the general secretary of the National Pensioners Convention, said: "Millions of older people will feel cheated by the Government's new arrangement for raising pensions. Whilst the difference might not sound very much to government ministers, we know that over two million pensioners are living in poverty, three million pensioner households are in fuel poverty and millions more are struggling to make ends meet."
Yesterday's figures showed inflation at its lowest level for almost three years. But City analysts said the fall could be short-lived because of rising food, energy and petrol prices.
Cathy Jamieson, a Labour Treasury spokeswoman, said: "This fall in the inflation rate is welcome, but families and pensioners will face a real squeeze from big hikes in energy and food prices in the coming months. Instead of easing the squeeze, the Government is making things even harder for families on low and middle incomes."