Joel Muckett 17 Oct 2017 04:21pm

Inflation rises to highest level in five years

Inflation in the UK has hit its highest point since April 2012 after rising for a second consecutive month

Consumer price inflation (CPI) increased to 3% in September, up 0.1% from August, the Office for National Statistics (ONS) revealed.

The increase was attributed to growing prices for food and recreational goods, as well as transport costs which fell less than they did a year ago.

It is now more likely that the Bank of England (BoE) will raise interest rates for the first time in a decade.

Currently, inflation stands a full percentage point above the BoE’s target, meaning its governor Mark Carney would have to write a public letter of explanation in the events of prices rising.

Andrew Sentance, senior economic adviser at PwC, said the rise in inflation was unsurprising, as the value of the pound had dropped in the past 18 months resulting in import costs and increased prices.

“This latest rise in inflation will add to the squeeze on the spending power of consumers and is likely to prolong the period of sluggish growth we are currently seeing here in the UK,” he said.

Sentance could not rule out an increased inflation rate, due to the possibility of the Bank of England MPC being under pressure to increase interest rates next month.

“A gradual rise in interest rates would help support sterling and reduce the risk that the current surge in inflation becomes more prolonged and persistent,” he said.

The Resolution Foundation’s senior economic analyst David Finch said the rise would deal a “double living standards blow” to low and middle income families who were faced with shrinking pay packets and reduced state support.

“Rather than addressing the squeeze, government policy is making things worse by freezing benefits at a time when inflation is almost 3%,” he said.

Finch called on the chancellor to use his Budget next month to provide “much needed relief” to families by unfreezing working-age benefits.

“He could fund the policy by freezing the personal tax allowance which would bring in around £2bn, largely from better-off households,” he added.

For consumers, any “significant” easing would be “unlikely” for the rest of the year as inflation would remain at about 3%, according to EY’s Item Club chief economic advisor Howard Archer.

However, he acknowledged that could possibly change by the end of next year as an unexpected retreat in inflation could lower it to 2%.