Leader: Inflation figures may fatally undermine economic strategy

THERE can be little doubt that the latest inflation figures, while broadly expected, are a deep disappointment. The rise in the Consumer Price Index measure to 5.2 per cent makes a mockery of the Bank of England’s 2 per cent inflation target, while the headline RPI rate is now at its highest since 1991.

It reveals the intensifying pressure on household budgets – particularly those where incomes have been frozen. It further adds to the erosion of savings and the plight of millions of pensioners. It has further damaged – if that is possible – the credibility of the Bank of England’s inflation targeting. And it has added considerably to the woes of Chancellor of the Exchequer George Osborne.

The inflation out-turn for September is significantly higher than was forecast in the March Budget by the Office for Budget Responsibility. And it adds, on authoritative calculations, between £1.2 billion and £1.8bn to the cost of pensions and social security benefits compared with the Budget estimates. This is a further blow to the Chancellor in his attempt to stick to his programme of targeted deficit reduction. And if this unravels, so too does the central thread of the government’s economic strategy.

Over many years it has been the custom of government, agreed by successive Labour and Conservative administrations, to use the September inflation reading as the basis for adjusting pension benefits and social security payments to take effect in the following fiscal year. Last night the government declined to confirm whether it would follow usual procedure on this occasion to use last month’s inflation rate for this purpose, insisting that such an announcement is reserved for chancellors in the Autumn Statement. This is due this year on Tuesday 29 November.

Now it may be that this is a case of strict adherence to past practice and protocol. But it has given rise to fears that the government may decide not to increase pensions and benefits by 5.2 per cent, but at a lower rate – for example, the 4.3 per cent that was forecast in March to be the inflation rate for September. This could be done on the premise that inflation has now peaked and was likely, as Bank Governor Sir Mervyn King forecast last night, to fall back towards the 2 per cent target in the course of the next 12 months.

But while a fall in inflation does look likely, how can we be sure? The Bank has consistently under-estimated the strength of inflation in recent years. Such a course would also be seen as sharp practice and spark a thunderous political row – one that could shake the coalition and spark no end of trouble for the Prime Minister.

Coming as it would in a bleak and dangerous period for our economy, as Sir Mervyn warned in a notably dark speech last night, this would be seen as a cut too far for public acceptance. Mr Osborne should think carefully before taking a course he may soon regret.