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The Guardian - UK
The Guardian - UK
Business
Phillip Inman

Sticky UK inflation puts Rishi Sunak’s target in jeopardy

Rishi Sunak on a visit to a Sainsbury's petrol station last year
Rishi Sunak on a visit to a Sainsbury's petrol station last year. Fuel prices are a wild card that could drive up inflation. Photograph: Simon Walker/HM Treasury

The latest inflation figures will be a huge disappointment to Rishi Sunak, as they will be to millions of households across the UK who long for the cost of living crisis to end.

Economists expected a small fall in September from August’s 6.7% inflation rate, but instead it remained stubbornly unchanged.

The prime minister promised in January to halve last year’s 10.7% rate by the end of 2023 and that looks in jeopardy.

To steal the words of the former Manchester United manager Sir Alex Ferguson when he acknowledged how the closing stages of the men’s 2003 Premier League title race was a close-run thing, it’s squeaky bum time inside No 10.

For those advisers who told Sunak the target was a surefire winner, giving Jeremy Hunt some room for manoeuvre in his autumn statement on 22 November and more importantly in his pre-election budget next year, life is going to be uncomfortable.

There was better news from a fall in food prices, which dipped month on month by 0.1%, compared with a rise of 1.1% between the same two months a year ago.

This brought the annual rate of food inflation down to 12.2% from a recent high of 19.2%.

Next month, there is likely to be a one percentage point drop in the consumer prices index (CPI) from gas and electricity prices, which have stabilised since the dramatic increases seen last year.

James Smith, an economist at the Resolution Foundation thinktank, said the effect of the energy price cap increase last year dropping out of the CPI comparisons would be even larger, sending inflation below 5% and handing Downing Street a comfortable victory.

Suren Thiru, economics director at the accountancy body ICAEW, was not so sure, saying only that the fall in energy costs would only bring inflation below 6%.

The wild card is the cost of petrol, which offset the drop in food last month and could continue to climb if the crisis in the Middle East escalates.

Thiru said September’s “sticky inflation” meant a Bank of England meeting to set interest rates in November was “on a knife-edge”.

Another interest rate rise risked “needlessly suffocating economic activity and deepening the financial distress for people and businesses”, he said, but it was possible if policymakers decided to take a hard line.

Smith said he was concerned that ministers would choose to ignore September’s inflation figure when setting benefits next year.

The September figure is supposed to be the basis for the increase in benefits the next April, allowing 9 million recipients a chance to plan their household incomes.

He said a decision to limit the increase, as it has done seven times since 2010, would mean many low- and middle-income families across Britain “will pay a heavy price”.

He added families who receive benefits would experience a fall in incomes of £460 on average from a freeze, “while many low-income families with kids face much higher income losses, rising to £1,200 for a low-income couple with two children”.

It is an indication of the difficulties faced by all households when inflation remains elevated, eating into disposable incomes.

A rise in interest rates from 5.25% will bring extra pain running into thousands of pounds a year for mortgage payers, posing another headache for the prime minister as he tries to navigate his way to sunnier economic uplands.

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