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Today’s inflation figures from the Office for National Statistics (ONS) show prices have risen by one percent year-on-year to July – up from 0.6 percent in June. The ONS Consumer Price Index shows UK inflation “picked up more than expected”, according to Rupert Thompson, Chief Investment Officer at Kingswood.
Mr Thompson said: “UK inflation picked up more than expected in July with the headline rate increasing to 1.0 percent from 0.6 percent and the core rate rising to 1.8 percent from 1.4 percent.
“Culture and recreation led the increase no doubt due to the marked shifts in consumer behaviour brought about by the lockdown.
“Core inflation is now at its highest level in a year and only slightly below the BoE’s [Bank of England] two percent target which will be a relief for the MPC and take some of the pressure off for further policy easing.”
Amid the latest figures, the state pension triple lock mechanism has been addressed.
In the UK, the basic and new state pension rises annually by whichever is the highest out of the average percentage growth in wages in Great Britain, the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI), and 2.5 percent.
And, Steven Cameron, Pensions Director at Aegon, has warned the next months are “critical” for pensioners as public sector pension increases as well as the state pension triple lock use figures to September, which are published in October.
Mr Cameron today commented: “While today’s figures showed that consumer price inflation rose to one percent for the year to July from 0.6 percent the previous month, the impact of COVID-19 and lockdown measures restricting what we can spend money on is making it hard to predict inflation figures month on month.
“The coming months’ figures are critical for pensioners though as public sector pension increases are based on CPI figures to September published in October and there’s an expectation inflation will nose dive, with the Bank of England’s Monetary Policy Report outlining it may drop to minus 0.3 percent for the year to August.
“State pensions increase by the triple lock (the highest of price inflation, earnings growth or 2.5 percent) and again, it’s the September inflation figure published in October which is used here.
“If both inflation and earnings growth are particularly low or even negative, the underlying 2.5 percent guaranteed increase will come at a significant cost to the Government on top of their other COVID-19 bailout measures and put significant pressure on the future of the triple lock.
“While a bigger inflation increase compared to last month may raise hopes, pensioners will need to hold their breath to find out what future months hold in store.”
In April this year, the state pension increased by 3.9 percent – with the rise tied to wage growth.
Following the financial impact of the coronavirus pandemic, some have wondered whether Chancellor of the Exchequer Rishi Sunak will make changes to the triple lock system.
The latest ONS earnings figures – which showed average total earnings dropping by 1.2 percent – were released last week, and Mr Cameron addressed the 2.5 percent underpin in the triple lock.
He said: “A 2.5 percent increase next April would cost the Government almost £2.5billion, not just in the coming tax year but in all future years.
“And if the earnings component is kept as is, there’s a high chance of a record increase in state pensions the following year with an even greater price tag.
“This raises major issues around how to share the cost of repairing the nation’s finances across generations.
“While cutting back on the state pension triple lock would save billions, it would be highly unpopular with state pensioners.
“The Chancellor might decide to swallow the cost of a 2.5 percent increase in 2021 but may need to change the way earnings increases are reflected, either suspending this component or temporarily averaging out earnings increases over two or more years until they stabilise.
“Any changes to state pensions also need [to be] viewed alongside the huge sums being spent on initiatives for those of working age.
“The furlough scheme is expected to cost £69billion, the bonus for keeping workers on after furlough up to a further £9.4billion and there’s a predicted £2.4billion price tag for the kickstart scheme for under 25s.
“However, these schemes are one offs and unlike state pension increases, don’t lock the Government into additional spend in future years.
“If the Chancellor is planning any changes to state pensions, the sooner these are announced the better.
“With many pensioners needing to get by on fixed incomes, it’s vital they know well in advance what to expect and are not left disappointed if expectations aren’t met.”
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