The Inflation Report Explained for 2012

This is why our mobile phone bills are going up

Families facing the biggest squeeze on household incomes since the 1930s should expect some respite from high inflation next year, Bank of England governor Sir Mervyn King said.

Sir Mervyn said price pressures within the UK still remained "subdued" and weakening demand should see prices fall further, despite CPI inflation hitting a three-year high of 5.2% in September.
Spiralling energy tariffs and bumper mobile phone bills were behind the higher inflation rate, which dwarfs average wage growth of just 1.8% a year and comes as unemployment is at a 17-year high.
The Office for National Statistics (ONS) said gas and electricity jumped 13% and 7.5% respectively, food shot up 6.4%, communication costs, driven by mobile phone charges, increased 5.9% and transport prices gained 8.9% on a year ago.

Sir Mervyn defended the Monetary Policy Committee's (MPC) decision to pump an extra £75 billion into its quantitative easing programme - a move which could fuel further rises in inflation.
He said: "It may seem odd to many that a time of high and rising inflation, the MPC has eased policy further."

He went on: "Increases in energy prices, import prices and VAT account for the current high level of inflation. Once the effect of these temporary factors begins to dissipate, inflation should fall back sharply early next year."

Elsewhere, Sir Mervyn said new incentives should be provided to banks to encourage lending to small and medium-sized enterprises (SMEs) but he said ultimately this was down to the Government.
September's inflation rate is traditionally used to calculate April's rise in state benefits, although the Government has yet to confirm this will happen.

If it does, the single state pension will increase by £5.31 to £107.46 a week, while Jobseeker's Allowance will increase by £3.51 to £71.01 a week.

At a time when Chancellor George Osborne is attempting to reduce borrowing levels, the Institute for Fiscal Studies estimates the inflation spike will add an unexpected £1.8 billion to Treasury benefit calculations for 2012/13.

However, the figures are also used to determine business rates, which could result in companies paying an extra £1.3 billion next year, including £350 million more from the hard-pressed retail sector.
Jonathan Loynes, chief economist at Capital Economics, said the unexpectedly sharp rise in September's figures had been a "nasty surprise".

The update from the ONS also highlights the pressure on those who are reliant on savings interest to help pay for rising food and fuel bills.

At a time of record low interest rates, comparison website Moneyfacts said to beat inflation a basic rate taxpayer needed to find a savings account paying 6.5%, while a higher-rate taxpayer required an account at least 8.67%.

The rate of 5.2% is more than double the Bank of England's inflation target of 2%, a benchmark the central bank last hit in November 2009.

October's figure is likely to be just as high but economists agree with the Bank that the rate will start to fall back next year as January's VAT hike to 20% falls out of the annual comparison.
This view was reinforced earlier this month when the Bank announced it would pump an extra £75 billion into the economy, despite the threat such a move would pose to inflation.

Chris Williamson, chief economist at Markit, said the "misery index" - a measure combining both inflation and unemployment - was at its highest level in the UK since October 1992.

He added: "UK and US households are under the greatest pressure in terms of rising prices and job worries for 19 and 28 years respectively."

It will be the first time the uprating of state benefits is calculated using CPI rather than the retail prices index (RPI) rate of inflation, which rose from 5.2% to 5.6% in September, the highest rate in 20 years.
If the calculation was still based on RPI, the single state pension would have been £108.42 and the joint one would have been £173.36.

TUC general secretary Brendan Barber said: "This cut could slash public sector pensions, as well as many in the private sector, by nearly 30% over the next three decades, and send many more people into poverty in retirement."

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