Inflation expected to jump to highest since January last year

Inflation is expected to increase to its highest level for 21 months as more pressure piles on the Chancellor and the Bank of England.

Economists have predicted that Consumer Prices Index (CPI) inflation will have hit 4% in September, when the Office for National Statistics (ONS) reveals its latest data on Wednesday.

It would mark the highest level since January 2024.

Inflation struck 3.8% in July and August amid pressure from rising food prices, as firms highlighted increased tax and labour costs.

Economists at Pantheon Macroeconomics predicted that higher motor fuel and air fare prices would help drive inflation to 4% in September.

It also pointed towards “strong clothes prices” for the month, but indicated this could be offset by “slightly softer” services price inflation.

Economists have also suggested there could be a contribution from increased private school fees.

Some schools were expected to increase fees from the start of the new school year as they staggered higher costs for parents after the Government introduced a 20% VAT rate for private school fees at the start of the year.

September’s predicted jump in inflation could represent a peak in the rising cost of living for UK households.

The Bank of England previously forecast that inflation would peak at around 4% in September before steadily falling.

Pantheon Macroeconomics’ Rob Wood has said he expects inflation to “slow only slightly” in the following months, dipping to 3.8% by the end of the year.

Other economists have been more optimistic, with Investec suggesting it expects the rate to have peaked at 3.9% in September before falling.

Any increase would still highlight a challenging economic backdrop for the Bank of England as it seeks to bring inflation down to its 2% target rate.

On Friday, the Bank’s top economist Huw Pill urged other rate-setters to be “more cautious” about future cuts due to concerns that inflation could stay stubbornly high.

Another rise in inflation could also be a major concern for Chancellor Rachel Reeves, a month ahead of her autumn Budget.

The September inflation rate is typically used to decide the level of increase for many benefits, such as universal credit, tax credits and disability benefits.

This rate is also a key part of the Pension Triple Lock, which is used to decide how much pensions will increase by in the following April.

However, the increase is based on either this inflation rate, average earnings growth between May and July, or 2.5%.

Given earnings growth was confirmed as 4.8%, the inflation rate will only be used if there is a shock acceleration beyond this level.

A rise in inflation in September could result in higher-than-expected spending when the Chancellor is already looking to fill a black hole in the state finances.

However, higher inflation would also contribute to a higher tax take, with the September rate also typically used to calculate some annual tax increases such as for business rates.