Higher inflation rise will cost poor families extra £100 a year, warns IFS

Inflation rose to 1 per cent in September, the highest level in almost two years

James Knightley, a senior economist at ING, said inflation could reach 3% in 2017, squeezing household disposable incomes (PA)

The jump in inflation will cost poorer households an extra £100 each per year, the Institute for Fiscal Studies (IFS) has warned.

The grim warning from the IFS, came after ONS data revealed that inflation rose to 1 per cent in September, the highest level in almost two years, as the sharp drop in the value of the pound since the Brexit vote in June helped drive up the cost of imports.

The IFS said poorer households will lose out as their benefits will not rise in line with the consumer price index (CPI).

The think tank said the former Chancellor George Osborne’s decision to freeze working-age benefits last summer had broken the traditional peg with inflation.

UK households on the lowest incomes would normally be at least partially protected from the impact of higher prices.

Benefit and tax credit rates are, with some exceptions, by default increased each April in line with the annual CPI inflation rate of the previous September. This means that higher prices should lead to higher benefit rates.

However, in the July 2015 Budget, the Government announced that, as part of its attempt to cut annual social security spending by £12bn, most working-age benefit and tax credit rates would be frozen in cash terms until March 2020.

(IFS)

The IFS explained: “This policy represented a significant takeaway from a large number of working age households. But it also represented a shifting of risk from the Government to benefit recipients.

“Previously, higher inflation was a risk to the public finances, increasing cash spending on benefits. Now the risk is borne by low-income households: unless policy changes, higher inflation will reduce their real incomes.”

The Government had expected this change to cost households £260 per year each. But with inflation higher than forecast, the real cost has jumped to £360.

“While it is perfectly reasonable to argue – as the 2015 Conservative Party manifesto did – that the working-age benefit system should be made less generous over this parliament, it is hard to see why the appropriate size of cut should be arbitrarily determined by the impact of movements in sterling on prices,” the IFS said.

The Office for National Statistic said the annual rate of CPI inflation was 1 per cent, up from 0.6 per cent in August and slightly higher than City of London analysts had been expecting.

This is the biggest monthly rise in the cost of household goods and services since November 2014.

Analysts said the cost of living in the UK could increase noticeably over the next 12 months and could peak at about 3 per cent by the end of 2017.

Thomas Laskey, investment manager from Aberdeen Asset Management, said: “The worrying factor is that today’s [Tuesday] figure represents only a tiny part of sterling’s steep drop, and no effect from the second big tumble earlier this month. Such a large fall in the currency will bring with it higher import costs and we’re likely to see much higher inflation in the months and years to come.”

Bank of England governor Mark Carney said that inflation was likely to overshoot the Bank’s official 2 per cent target over the coming years, but that the Bank would tolerate this in order to protect jobs.