Inflation jumps to 2.7% – Q & A

Inflation has increased from 2.2% in September to a massive 2.7% in October. Analysts believe that that this is largely down to the rise in higher education fees in September.

The latest Office for National Statistics (ONS) figures show that the rate of Consumer Prices Index (CPI) inflation rose to 2.7% in October from 2.2% in September.

The ONS claims that education costs increased by a massive 19.1% last month, as higher tuition fees came into effect.  The government lifted the cap on tuition fees from £3,375 to £9,000 a year starting in September.

Food prices, especially vegetables, also dramatically increased following a record wet summer affecting crop yields.

ONS also said that confectionary prices increased because a number of confectionary products had been reduced in size.

Retail Price Index (RPI) which includes housing costs also increased, from 2.6% to 3.2% over the same period.

Who will this affect?

The latest figures show that all households experienced an increase in inflation rates in October.  Younger generations, the under 30s, have seen a significant jump in inflation from 2.3% to 3.5% because of the spike in university fees.

Other age groups have seen a much smaller increase in inflation. According to the study, 30-49 year olds and 50-64 year old households have seen an inflation rate of 2.5% whilst those over 65 face the lowest rate of inflation at just 2.2%.

Shona Dobbie, Chief Economist, said:

“The increase in the headline rate of inflation rate this month is largely due to the very sharp rise in university tuition fees, which has boosted inflation in the education sector to a record high of 19.7%.

“This move has been significant enough to push the official headline rate of inflation up to 2.7% and the rate of inflation facing the under 30s up to 3.5%, which is its highest level since March.

“Apart from this exceptional move, inflationary pressures are highest in the case of food, beverages, tobacco and transport and so we have seen increases in the inflation rates facing all age groups this month.

“Middle-aged households currently face an inflation rate of 2.5% and the more elderly households face an inflation rate of 2.2%. However, although gas and electricity price inflation was negative this month, we know from the recent announcements of price increases that this will not last.

“Utility price increases tend to have the biggest impact on the more elderly households, as they spend a larger share of their budgets on these particular services. We therefore expect to see headline inflation increase over the next couple of months, with the biggest increases likely to impact the older households in particular.”

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Will inflation continue to rise?

September inflation levels were the lowest they have been for almost three years, nearly reaching the Bank of England target rate of 2%.  The bank has struggled to keep inflation low over the last few years because of the financial crisis.  Additional ONS figures show that the UK economy emerged out of recession in the three months to September.

However, inflation levels could only jump further as energy prices are set to rise over the winter period combined, with seasonal spending.

The ONS said that SSE’s price hike of around 9%, which came into force last month, was not included in October’s inflation figures. This is likely to contribute to an inflation hike for November.

Alan Clarke, economist at Scotia Bank, told the BBC: “Where do we go from here? Onwards and upwards. Utility bill increases are on their way. We’ve also got the effect of the US drought and increased food prices to factor in.

“I don’t think we’re going to get anything like the 2% inflation target.”

Living costs are steadily rising and without a rise in wages to match inflation levels, many could be left feeling the pinch.

The ONS revealed that unemployment levels have also dropped which is great for those struggling to make ends meet.

Unemployment fell by 49,000 to 2.51 million in the three months to September, lowering the total jobless rate to 7.8% from 7.9%.

The ONS said this was largely down to a drop in youth unemployment, yet economists argue that the rate of job creation is slowing and temporary work during the Olympics would have influenced these figures.

Long-term unemployment – those who have been out of work for over a year – increased by 12,000 in the same time.

The grim outlook of rising inflation, combined with high levels of unemployment, might spark households to start saving.

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