Yesterday's official inflation figures come as a blow to us all suffering from rising living costs but should provide some relief for pensioners and other benefit claimants who, under Government policy, should see their payments increase inline with the index.
Yet the rise in benefits and pension payments could lead to a taxpayer bill tipping £3billion, so how will the government respond?
The Retail Price Index increased to 5.6% last month, while the Consumer Price Index rose to 5.2%.
The figures hit households who are already reeling from rising the cost of living through hikes in fuel, food and energy prices, and pay freezes are squeezing the incomes of many more.
Inflation measured by the CPI has not been higher since the measure began in 1997, although it also hit 5.2% in September 2008. Inflation based on the RPI is at the highest rate for more than 20 years. RPI tends to be higher than CPI, because it includes mortgage interest payments and council tax – variables not included by CPI.
Increase in benefits
The Government uses September's inflation rate to determine the annual increase to benefits and pensions introduced the following April, so the latest figures suggest huge hikes which the taxpayer may have to foot the bill for. According to accountants KPMG, think-tank the Institute for Fiscal Studies have put the bill for an across-the-board 5.2% rise at around £3.4billion.
One possibility is that the State pension will be increased in line with expectations, but benefits will not. Yet this scenario would cause uproar as it would hit the most vulnerable hardest, such as the disabled and low income families.
During the Budget back in March, the government reconfirmed its policy to change the index used to increase many benefits from RPI to the CPI, a decision which charities and the TUC say will have a huge impact in itself.
Alison Garnham, Chief Executive of Child Poverty Action Group (CPAG) said: "[The] inflation figures will be used to peg benefits for the coming year, and so have a double impact on many low income families. From now on the Government is using CPI to uprate benefits instead of the higher RPI.
"This technical-sounding change will hit families in the pocket. This year, the difference will be 0.4% cent but the effect will get bigger every year and will tip more and more families over the edge into poverty."
TUC General Secretary Brendan Barber said the government's CPI stealth cut will slash public sector pensions, as well as many in the private sector, by nearly 30% over the next three decades, and send many more people into poverty in retirement.