Inflation on track to reach five-year high as squeeze on households increases
Inflation looks set to leap to a five-year high today as households face a triple-whammy hit from rising airfares, fuel and electricity prices.
The Consumer Price Index (CPI) measure of inflation is forecast to reach 3% for September, further outstripping wage growth and marking its highest level since April 2012.
Such a rise would leave Bank of England governor Mark Carney on the brink of writing a letter to Chancellor Philip Hammond explaining why CPI is climbing so rapidly.
The Government has set an inflation target of 2%, with protocol dictating that Mr Carney must contact the chancellor if inflation exceeds 3% or falls short of 1%.
Companies will also be keeping a close eye on the outcome of September's Retail Prices Index (RPI) reading.
Economists are pencilling in an RPI figure of 4%, setting up businesses for a £1.2bn tax hike in 2018 on top of the £23.9bn the Government is expected to haul in from English firms this year.
Philip Shaw, chief economist at Investec, said: "Our calculations point to an uptick in CPI inflation to 3%, placing it right on the edge of the Monetary Policy Committee's (MPC) tolerance threshold.
"That being said, we don't discount the possibility that this limit will be breached.
"This would then require the governor to pen an explanatory letter to the Chancellor at the next inflation report, explaining the more than one percentage point overshoot of the Bank of England's inflation goal."
The cost of living ticked up to 2.9% in August, bringing to an end a momentary pause in June and July at 2.6%.
It came as annual growth in earnings remained static at 2.1%, both including and excluding bonuses between May and July.
Once inflation is taken into account, total and regular pay both slipped by 0.4% over the period.
The bank has so far allowed CPI to run above target, as its upward move has been primarily driven by sterling's post-Brexit vote declines, rather than a fundamental rise in costs.
Investec said it believes that while clothing prices are likely to have dropped in September - due to high comparable figures in the same month last year - transport costs will "more than offset this".
Fuel prices are also expected to lift CPI - after hurricane Harvey disrupted US oil production - adding to pressure from a 12.5% electricity price hike by British Gas that took effect from mid-September.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, expects inflation to have reached 2.9% last month, as the rising cost of food puts upward pressure on the headline rate.
He added: "We continue to expect CPI inflation to jump to 3.1% in October, before easing back to the 2% target by the end of 2018."
There is growing speculation that the MPC could raise interest rates as early as next month, particularly after indications that all policymakers believed that "some withdrawal of monetary stimulus was likely to be appropriate" soon.