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Inflation unexpectedly dips but remains above Bank of England target

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nflation unexpectedly dipped to 3.1% in September, down from 3.2% in August and slightly below City forecasts.

But while September’s reading was slightly better than expected, inflation remains stubbornly above the Bank of England’s 2% target. The central bank believes price rises will peak at 4% by the end of the year. Some private sector economists think it could hit 5%.

“Global shocks have pushed up prices around the world, and we are working with businesses and international partners to address these pressures,” UK chancellor Rishi Sunak said in response to today’s data.

Economists believe September’s dip is also likely to be temporary. Numbers were skewed by the end of the Eat Out to Help Out discount scheme last year, which closed at the end of August 2020 and led to a jump in restaurant prices the following month.

Rachel Winter, associate investment director at Killik & Co, called September’s reading “a one-time blip”.

“A number of contributory factors will likely create inflationary pressure in the next month, most notably the global price increase in fuel,” she said. “This, combined with the fallout from supply chain issues caused by the pandemic, an ongoing skilled labour shortage, and rising food prices due to higher production costs, has created the perfect storm and will no doubt impact inflation soon.”

September’s inflation was driven by rising petrol costs, second hand cars, and rising council tax.

Jack Leslie, a senior economist at the Resolution Foundation, said: “Today’s inflation figure of 3.1% means that a typical worker will see their income tax rise by £78 next year, in addition to a rise in National Insurance contributions, as the personal tax allowance is frozen.

“And while an expected 3.1% rise in benefits will feel generous after a decade of benefit caps and freezes, that will be of cold comfort to over four million working-age households who have seen their Universal Credit support cut by £20 a week.”

The chancellor said: “We are supporting people with the cost of living, including through a new £500m support fund to help vulnerable households, the energy price cap, and assistance with energy bills through the winter.”

“The last thing households will want to think about is their mortgage payments going up too, but that now look more likely after the Bank of England indicated that it is ready to act – perhaps as soon as this year,” said Ed Monk, personal investing director at Fidelity International.

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