Inflation to fall sharply next year
Families facing the biggest squeeze on household incomes since the 1930s should expect some respite from high inflation next year, Bank of England governor Sir Mervyn King has said.
Sir Mervyn said price pressures within the UK still remained "subdued" and weakening demand should see prices fall further, despite CPI inflation hitting a three-year high of 5.2% in September.
Spiralling energy tariffs and bumper mobile phone bills were behind the higher inflation rate, which dwarfs average wage growth of just 1.8% a year and comes as unemployment is at a 17-year high.
The Office for National Statistics (ONS) said gas and electricity jumped 13% and 7.5% respectively, food shot up 6.4%, communication costs, driven by mobile phone charges, increased 5.9% and transport prices gained 8.9% on a year ago.
Sir Mervyn defended the Monetary Policy Committee's (MPC) decision to pump an extra £75 billion into its quantitative easing programme - a move which could fuel further rises in inflation.
He said: "It may seem odd to many that a time of high and rising inflation, the MPC has eased policy further."
He went on: "Increases in energy prices, import prices and VAT account for the current high level of inflation. Once the effect of these temporary factors begins to dissipate, inflation should fall back sharply early next year."
Elsewhere, Sir Mervyn said new incentives should be provided to banks to encourage lending to small and medium-sized enterprises (SMEs) but he said ultimately this was down to the Government.
September's inflation rate is traditionally used to calculate April's rise in state benefits, although the Government has yet to confirm this will happen.
If it does, the single state pension will increase by £5.31 to £107.46 a week, while Jobseeker's Allowance will increase by £3.51 to £71.01 a week.