Badly timed inflation fall will hit millions of low-income families next Spring

CPI inflation fell to 1.7 per cent in September, down from 2.2 in August, and ahead of a likely jump in October. This otherwise welcome temporary dip is bad timing for millions of low-to-middle income families, as the lower September figure will be used to uprate working-age benefits next Spring, the Resolution Foundation said today (Wednesday).

Lower inflation in September – driven by a very sharp fall in transport prices, reflecting drops in airfares and petrol prices – means that CPI inflation has fallen below the 2 per cent target for the first time since April 2021. However, the fall is not expected to last, with inflation set to rise by around 0.5 percentage point next month as previous falls in energy prices drop out of the 12-month inflation calculation.

With the CPI inflation figure for September used to uprate working-age benefits in the following financial year, the Resolution Foundation finds that a typical low-income family with two children in receipt of Universal Credit is set to see their annual UC award rise by £253 next April.

If working-age benefits were to be uprated in line with October inflation, including the 0.5 percentage point increase driven by energy prices (so that CPI inflation was 2.2 per cent), the same family would see their UC award rise by £327 instead (a cash gain of £74).

The Foundation adds that pensioners are less affected by this temporary inflation dip as the State Pension will be raised in line with total average weekly earnings growth (May-July) of 4.1 per cent. The Basic State Pension is due to rise by £362 to £9,201. This means that pensioner benefits are on track to rise over twice as fast as working-age benefits next year.

Lalitha Try, Economist at the Resolution Foundation, said:

“There was a larger-than-expected fall in inflation last month, but it will rise sharply in October driven by base effects from energy prices. This temporary fall is badly timed for millions of low-to-middle income families as will result in a lower increase in their benefits next year.

“A more timely measure of benefit uprating would deliver a cash gain to a low-income family with kids of around £74 next year.

“The Government needs to address the age divide in benefits which has left working-age support fall further behind rising wages and living standards.”