Inflation's 'nasty surprise' threatens household squeeze



Households are facing a further squeeze on their finances after inflation delivered a “very nasty surprise” last month and rose sharply on the back of spiralling university tuition fees and higher food bills.

Figures released by the Office for National Statistics showed that the consumer prices index (CPI (Berlin: CEJ.BE - news) ) soared from 2.2pc in September to 2.7pc in October, the highest level since May and one of the largest proportionate single month rises on record.

A Treasury spokesman described it as “disappointing” while Andrew Goodwin, an economist at the Ernst & Young ITEM Club, said it was a “very nasty surprise [because] the scale of the increase was surprisingly large”. The retail prices index (RPI), against which wage claims are often set, rose from 2.6pc to 3.2pc.

The squeeze on family finances had been easing after inflation fell to its lowest level in almost three years, providing a rare bright spot in the economy by promising a resurgence in household spending power.

However, the sharp rise and forecasts of further increases in the year ahead threaten to put households back under pressure and extend the squeeze on finances that has already lasted more than two years.

HSBC (LSE: HSBA.L - news) economist Simon Wells said: “With wage growth still around 2pc per year, inflation is outpacing it. This reduces real incomes and means the hard-pressed consumer is less likely to drive a recovery by increasing spending.”

Rob Harbron, economist at the Centre for Economics and Business Research, said: “A further factor constraining household finances but excluded from CPI is inflation on mortgage interest payments. This rose in October to the highest rate since May 2008, at 6.6pc.

“With inflation remaining well above the Bank of England’s target rate of 2pc and further pressures in the pipeline from food and utilities, real income erosions look set to persist.”

Although inflation rose sharply in October, the figures did not reflect planned rises in energy bills that are scheduled for the coming months. Investec (EUREX: INVF.EX - news) economist Philip Shaw has predicted that inflation will be back at 3.5pc within six months, saying: “Moreover the near 50pc surge in wheat and corn prices since the early summer looks set to add to inflationary pressures.”

The largest contribution to the accelerating growth in the cost of living was education, due to a record 19pc rise in university tuition fees after they trebled to a maximum of £9,000 a year in October. The second largest contributor was rising food prices, particularly potatoes, which Mr Shaw said made it “an especially bad month for students”.

Rising inflation made it less likely that the Bank’s Monetary Policy Committee would restart quantitative easing, the economists claimed, adding that Wednesday's Inflation Report was expected to show that prices will rise over the coming year more rapidly than previously expected.

Michael Saunders, UK economist at Citi, said: “The MPC may fear that a further extended period of above-target inflation after the repeated inflation overshoots versus forecasts and the target in recent years will erode their long-term credibility.”

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