Which advantages are linked to September’s inflation studying?

Inflation came in at its lowest level in three years after a surprise fall in September, paving the way for more interest rate cuts.

For millions in receipt of benefits, the September reading paves the way for smaller payment rises.

The Government uses the inflation figure from September to calculate how much benefits, including universal credit, should increase by the following April.

However, the bigger-than-expected fall in inflation is expected to be a temporary dip with CPI set to rise again by the end of the year.

While good news for the Treasury, which will pay out less in benefit payments, claimants are likely to see a much smaller rises than previously expected next year. 

We look at what benefits and bills are linked to inflation and what it will mean for claimants.

Why are benefits affected by inflation?

Historically, the Government has used September’s inflation reading as the base month to raise benefit payments the following April.

Since 2011, the default inflation measure used is the Consumer Prices Index (CPI) to ensure benefits are kept broadly in line with the cost of living.

September’s weaker-than-expected reading, driven by a fall in transport prices, means that headline inflation has dipped below the Bank of England’s 2 per cent target.

While good news for overall costs, millions of benefit recipients are set to lose out as inflation is expected to rebound in October.

Because benefits are uprated using a lagged measure of inflation, it means that the real value declines when inflation rises again.

By April, the rate of inflation could theoretically be much higher than the Bank of England’s target, while benefits rise by just 1.7 per cent.

Lalitha Try, economist at the Resolution Foundation, said: ‘This temporary fall is badly timed for millions of low-to-middle income families as it will result in a lower increase in their benefits next year.’

The foundation’s calculations found that a typical low-income family with two children in receipt of universal credit will see their annual benefits rise by £253 next April – or just over £20 per month.

If working-age benefits were uprated in line with October’s reading, which is widely expected to be around 0.5 percentage points higher, a family would see their universal credit rise by a higher annual sum of £327. 

How much will the state pension increase?

Pensioners won’t be as affected by a temporary fall in inflation because the Government has committed to the triple lock.

This guarantees that the state pension will rise by inflation, average earnings or 2.5 per cent, whichever is higher.

This year, the highest was the rise in average wage growth at 4.1 per cent. It means the full, new flat-rate state pension is expected to increase to £230.30 a week, bringing the total to £11.975 a year. It marks an annual increase of £473.

The full, old basic state pension is expected to increase to £176.45 a week, bringing it to £9,175 a week.

At the same time, the Chancellor is scrapping the Winter Fuel Payment, worth between £200 and £300, for all pensioners except those eligible for Pension Credit.

‘Rachel Reeves may choose to shout out about this inflation-beating boost in her first Budget in two weeks time… but how long they can keep these promises remains to be seen,’ says Rachel Vahey, head of public policy at AJ Bell.

‘The state pension is now at a level perilously close to the frozen personal allowance and should overtake it in two years’ time. 

‘At that point something must surely give. But slowing the increase in state pension growth or unfreezing the personal allowance both seem unlikely.

‘It could be that this fast-approaching crunch time means the Government will finally be forced to address the question of how much the state pension should really offer, at what age, and how it can increase payments sustainably each year.’

Which other benefits are uprated with inflation?

Benefit uprating affects a wide range of benefits, including both DWP and HMRC-administered payments.

They include all all disability benefits, like personal independence payment (PIP), attendance allowance, disability living allowance and the carer’s allowance.

Universal credit, which is one of the most widely claimed benefits, is also set to rise by 1.7 per cent next April. It marks a significant fall from the 6.7 per cent paid out earlier this year.

Last year, the standard universal credit allowance for a couple over the age of 25 jumped almost £40 a month. Next April, it’s set to rise by just over £10, according to calculations by AJ Bell.

A small uprating of universal credit may also reignite the debate over the two-child benefit cap and whether to remove it to help low-income families. 

The policy, introduced by the Conservatives in 2017, limits the amount of universal credit given to families with more than two children born after April 2017.

Low-income families typically receive an extra £3,455 a year of universal credit or tax credits for each child they have.

But the two-child cap means claimants don’t receive any more for a third or subsequent children born after 6 April 2017.

Critics say that it pushes more families into poverty and adversely affects single parents.

What about other bills and train fares?

Inflation has been used to calculate various other bills, including phone and broadband, but these tend to use data from later in the year.

In the past, providers have used December’s inflation data to calculate how much to charge customers, usually with an additional charge.

However, new rules mean that from next year, firms will no longer be able to hit customers with inflation-linked price hikes in the middle of a contract.

Instead, phone and broadband firms have to display mid-term price rises in pounds and pence in a prominent way. 

However, regulator Ofcom did not impose any cap on how much these firms were allowed to charge meaning customers could be in store for even higher bills. 

Train companies have also used inflation to calculate how much they can increase their fares.

Normally, train fares rise in March by the retail prices index (RPI) level of inflation in July of the previous year, plus or minus up to 1 per cent.

In July, the ONS said that July RPI inflation was 2.2 per cent, meaning travel firms could increase fares by up to 3.2 per cent next March.