State pension to rise as inflation stays high

The Consumer Prices Index (CPI) remained unchanged at 3.1% in September, according to the Office for National Statistics (ONS).

But pensioners are set for a boost after today's figures show the Retail Prices Index (RPI) inflation – the measure, which includes housing costs, currently used to calculate the basic state pension – at 4.6% last month (see the State Pension Boosting guide).

This is down from 4.7% but is still high.

The news come as a relief to pensioners after last year's blow, when RPI fell into negative territory, which meant pension payments rose by only the minimum amount set – 2.5%.

The Government uses RPI each September to determine the following April's rise in the basic state pension, although it has pledged a minimum rise of 2.5% or the increase in average earnings, dependent on whichever is higher.

Given that RPI is likely to be the highest, this will mean the current payment will rise by around £4.49 a week, from £97.65 to around £102.14.

The couples pension will rise from £156.15 to around £163.33.

But from 2012, basic state pension rises will switch to using CPI, which may mean lower increases.

Not all good news for pensioners

The downside for pensioners is for those who rely on savings as an income. As inflation is still high, it means nest eggs may not be growing as fast as the cost of living which diminishes their purchasing power.

This will already hit benefit payments, with the Government switching to CPI this year for its calculations of forthcoming changes to support such as jobseeker's allowance, tax credits and public service pensions.

Food prices are expected to continue to rise and this, coupled with the pending hike in VAT to 20% in January, means the pressure on the cost of living is not set to ease.

Could base rate rise?

The sticky rate of inflation is likely to add weight to the argument to lift interest rates – a move backed by Monetary Policy Committee member Andrew Sentance, who has been alone in voting for an increase in rates to 0.75% from the current 0.5% figure.

Jonathan Loynes, chief European economist at Capital Economics, says the figures mark the first rise in clothing and footwear inflation since 1992.

He adds: "This may lead to some concerns that the constant downward pressure on high street goods prices from cheap imports seen over the last decade or more is finally coming to an end. But we suspect such conclusions would be premature.

"Our guess is that the rise is a result of some retailers starting to raise their prices ahead of the coming VAT hike, and other temporary effects may have played a part, too.

"Overall, the stubbornness of inflation is certainly not making life easy for the Bank of England."

Further reading/Key links

Pension help: State Pension BoostingBest rates: Top Savings, Top Fixed Savings Stay safe: Safe Savings