State pension to break £100 barrier but inflation boom hits families hard

THE cost of living remained well above target last month as rising food and clothing prices put household budgets under growing pressure.

The unchanged figure poses a dilemma for policymakers debating the need for fresh economic stimulus, but there was better news for pensioners as the state pension will now break through the 100 barrier for the first time next year.

The consumer prices index (CPI) measure of inflation stayed at 3.1 per cent for the third successive month in September, according to the government's Office for National Statistics, above the Bank of England's 2 per cent target.

It said falling air fares and petrol prices had been offset by a record 6.4 per cent rise in the cost of clothing and footwear as retailers nudged prices up ahead of next year's VAT increase.

The retail prices index (RPI) measure of inflation, which includes housing costs, dropped marginally to 4.6 per cent in September. It means a basic state pension will rise from 97.65 to 102.15 a week next April.

Annual pension payment increases are based on inflation the previous September, rising in line with whichever is highest out of average earnings growth, RPI or 2.5 per cent. With earnings below inflation the basic state pension will increase by RPI next year. The 4.49 rise in the weekly basic state pension is nearly double the 2.40 increase this year, when negative inflation in September 2009 meant pension payments rose by the minimum amount of 2.5 per cent. The joint pension will increase from 156.15 to 163.33.

But from April 2012 pensioners will be hit by a switch to the CPI measure of inflation, which is typically lower. The switch from RPI to CPI will take effect from next April for public sector pensions, the state second pension and some private sector final salary pensions, which will rise by just 3.1 per cent.

The unchanged inflation rate creates a dilemma for the Bank as it decides whether to boost the economy by expanding its quantitative easing programme.

David Miles, a member of the Bank's Monetary Policy Committee, fuelled speculation yesterday that further stimulus could be on the way when he warned against tightening monetary policy before a recovery had been secured. Miles said there was no sign that the typical recovery process was under way, with little evidence of rising wages, rapid lending growth and growing consumer and industry confidence.