Brace yourselves: Brexit bounce boosts inflation

Today’s official figures from the Office of National Statistics (ONS) show that the annual rate of inflation has nearly doubled – up from 0.6% in August to a full 1.0% in September. This increase in the Consumer Prices Index (CPI) is the largest annual increase recorded in over two years.

As the Government drives on towards Brexit, the value of the pound sterling has fallen, pushing up the price of imports. So far, the ONS has been reluctant to say this has driven inflation up, blaming increased prices for petrol, clothing and hotel rooms for this month’s increase. If this proves to be the case, things can only get worse. The fall in the value of the pound will push UK prices up – and if these rises have not already been reflected in the September figures, the full impact of them will come through in October and November.

This has led to fears that inflation will soon outstrip wage increases – currently running at an average rate of 2% – and interest on savings on which pensioners in particular rely. In other words, we will all see our standard of living start to fall – with those on the lowest incomes the worst hit. Only a small number of the low paid will benefit, as increases in maternity and paternity pay as well as some disability benefits are linked to the September CPI and will therefore be increased by 1%. However, the value of the increase will soon be wiped out if inflation continues to rise.

Some economists are trying to play down the news about inflation, pointing out that it has often been much higher. This is little comfort to those trying to make ends meet today. Others are welcoming the rise. Inflation over 2% means that very many savers, whose investment returns are lower than this, are in effect losing money. This may encourage them to stop saving money and start spending it, triggering a minor boom in the economy.

In other words, what will happen is anyone’s guess.

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