Inflation alert follows low figure

Struggling households are unlikely to enjoy the benefits of softer inflation for much longer despite a dip in the cost of living last month, economists have warned.

Smaller rises for utility bills and clothing prices compared with last year helped the consumer price index (CPI) rate of inflation edge down to 2.5% in August from 2.6% in July, said the Office for National Statistics (ONS).

But the rising cost of petrol and diesel at the pumps maintained upward pressure on inflation in August and will fuel fears that the rate will not fall as rapidly as the Bank of England hopes, tightening the squeeze on households.

And economists warned droughts in the United States are likely to mean higher food prices while more energy price hikes are in the pipeline this autumn. Higher university tuition fees will also add to inflation next month.

Victoria Clarke, economist at Investec, said inflation could rise back up towards 3% by the middle of next year. She said: "From here we do expect inflation to moderate a touch further. However, we should caution that we do expect this trend to turn upwards again soon, with sources of upward pressure emerging over the months ahead including university tuition fees, higher food prices following the recent US droughts and higher pump fuel prices too."

The figures were published amid reports the Government is considering linking hikes in benefit payments to average pay rather than inflation. September's CPI figure is typically used to determine the following April's rise in the basic state pension. A Department for Work and Pensions (DWP) spokeswoman said any changes to how benefits hikes are calculated will be looked at by the Government later this year.

The CPI rate of inflation hit a 31-month low in June after steadily declining from a peak of 5.2% last September but unexpectedly rose to 2.6% in July.

The forecasts will trouble the Bank of England, which is tasked with keeping inflation as close to the Government's 2% target as possible, after it previously said the rate would fall throughout 2012 and into 2013. The Bank's Monetary Policy Committee (MPC) stepped up its quantitative easing (QE) emergency support programme in July, from £325 billion to £375 billion, which has drawn criticism by pension campaigners due to its adverse impact on inflation.

Colin Edwards, economist at the Centre for Economics and Business Research (Cebr), said: "On the whole, today's figures represent marginally better news for UK consumers. The more consumers are able to buy with their incomes, the higher their living standards are likely to be. However, looking forward, it seems unlikely that consumers will be provided with similar respite from further falls in inflation."

Labour Treasury spokeswoman Catherine McKinnell said: "This small fall in the inflation rate is welcome, but families and pensioners are still facing a big squeeze on their incomes as prices continue to rise faster than wages."