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UK inflation falls despite rising petrol prices and supply chain crisis

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UK inflation fell back slightly in September despite pressure on households from soaring petrol prices and businesses being hit by shortages of lorry drivers and materials.

The Office for National Statistics said the consumer prices index eased to 3.1%, from 3.2% in August, as the impact of the government’s eat out to help out scheme dropped out of the calculation for the annual inflation rate.

Petrol prices hitting the highest level in eight years, as well as the rising cost of food, drink, secondhand cars and air travel, maintained elevated pressure on households’ living costs. Prior to August, the last time overall inflation was at 3.1% or higher was 2017.

The modest fall in the headline rate reflects a rise in restaurant prices in September the previous year after Rishi Sunak’s discount scheme, which had temporarily reduced prices for consumers, finished at the end of August 2020.

Inflation is calculated based on the change in price of a basket of goods and services over a 12-month period, meaning a sharp movement a year earlier can distort the annual rate.

Inflation graphic

In the final snapshot before the chancellor’s budget next week, and as the Bank of England considers the first interest rate rise since the start of the coronavirus pandemic, the ONS said upward pressure on living costs remained in place across much of the economy last month.

The costs of goods produced by factories rose again, with metals and machinery showing a notable price increase. Against a backdrop of severe lorry driver shortages and disruption to global supply chains caused by Covid-19 and Brexit, road freight costs for UK businesses also continued to rise across the summer.

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Average petrol prices stood at 134.9p a litre, up from 113.3p a year earlier, hitting the highest level since 2013. However, the figures reflect a period before panic buying at the end of September, when shortages at the pumps led to further reported increases in costs.

Analysts warned that the drop in the headline rate of inflation would prove temporary, with further pressure on living costs expected in October amid soaring wholesale gas and electricity prices and the lifting of Ofgem’s consumer price cap on household bills.

Reflecting an increase in business costs that could hit consumers in future, inflation in factory gate prices rose from 6% in August to 6.7% last month, the highest level for almost a decade.


What is inflation and why does it matter?


Inflation is when prices rise. Deflation is the opposite – price decreases over time – but inflation is far more common.

If inflation is 10%, then a £50 pair of shoes will cost £55 in a year’s time and £60.50 a year after that.

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Inflation eats away at the value of wages and savings – if you earn 10% on your savings but inflation is 10%, the real rate of interest on your pot is actually 0%.

A relatively new phenomenon, inflation has become a real worry for governments since the 1960s.

As a rule of thumb, times of high inflation are good for borrowers and bad for investors.

Mortgages are a good example of how borrowing can be advantageous – annual inflation of 10% over seven years halves the real value of a mortgage.

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On the other hand, pensioners, who depend on a fixed income, watch the value of their assets erode.

The government’s preferred measure of inflation, and the one the Bank of England takes into account when setting interest rates, is the consumer price index (CPI).

The retail prices index (RPI) is often used in wage negotiations.

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The Bank of England has said soaring energy costs will drive inflation above 4% this winter, with the gauge for the rising cost of living expected to remain elevated until at least the summer of 2022. Threadneedle Street is widely expected to raise interest rates from the current historic low of 0.1%, possibly as early as November.

Despite an intense squeeze over the coming months, economists said the inflation rate would gradually fade back towards the Bank’s 2% target rate later next year as temporary disruption linked to Covid-19 dissipates.

Dean Turner, an economist at UBS Wealth Management, said: “The forces pushing prices up are set to increase in the coming months, which suggests that inflation will be moving up before the end of year. The good news for households and firms is that price pressures should ease next year.”

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With the September inflation reading used by the government to uprate the value of benefit payments each year, as well as state pensions and business rates, a rise of 3.1% is expected next year. However, the increase for pensioners could have been higher if ministers had not broken the triple lock’s link to average earnings, which have risen by more than 8%.

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Labour and poverty campaigners said the government was adding to a severe autumn squeeze on living costs after cutting universal credit by £20 a week from early October, the biggest ever overnight reduction in social security benefits.

Bridget Phillipson, the shadow chief secretary to the Treasury, said: “The Tories are out of touch, hitting people with a universal credit cut and a jobs tax, just at a time when they’re left with less money in their pockets at the end of the month and are feeling the pinch.”

Sunak said the government had put in place a £500m support fund to help vulnerable households. The chancellor added: “Global shocks have pushed up prices around the world, and we are working with businesses and international partners to address these pressures.”