Benefits set to be hit by inflation drop timing

The timing of falling inflation could cost benefits claimants next April when annual increases come into effect. Those relying on benefits could see inflation quickly outstripping any payment increases after the lowest figure in over three years was recorded for last month, but is predicted to almost double by the end of 2024.

This month, the ONS (Office for National Statistics) reported September's CPI (consumer price index) figure as 1.7%, the first time it has fallen below the official Bank of England target of 2% since April 2021. It was driven by a significant fall in transport prices following lower airfares and petrol prices. This has been reported as good news for those hoping interest rates will drop further by the end of the year, but could be bad news for those relying on inflation-linked benefits.

This is because many government benefits, including Universal Credit (UC), rise at the start of each tax year at the rate of inflation recorded for the previous September. The millions of people who receive such benefits will, therefore, expect to see a rise of just 1.7% in April 2025. However, the reason this small rise could be so damaging to household income is that inflation is expected to pick up before the end of the year and hike living costs prior to any benefit rises kicking in.

How much will inflation rise before April 2025?

No inflation prediction is guaranteed, but many analysts expect it to rebound before the year is out. Analysts at Pantheon Macroeconomics said: "Looking further ahead, we think September will be the low point for CPI inflation. Oil price rises mean energy costs will rebound, while we expect the chancellor to boost duties in the October budget.

"CPI services inflation should keep gradually slowing but that still leaves us expecting CPI inflation to rise to 2.8% in December, and 3% next September."

Alongside these predictions of higher costs, previous falls in energy prices will drop out of the 12 month calculation next time around. This suggests October's inflation figure is on course to top September, with further rises likely as energy prices become the key driver for a higher cost of living in the latter parts of 2024 and into 2025.

What would increased inflation mean for people on benefits?

If inflation were to rise to 3% or higher, benefit claimants would see their value of income eroded by increasing living costs, even though the amount of money coming in has gone up. The effects of inflation have been pronounced in recent years, with CPI hitting a record high of 11.1% in October 2022. Rising costs in supermarkets, at the petrol pump and on energy bills mean the basic costs of getting by have risen more quickly than incomes in the past few years. Though inflation has slowed recently – and is now below the Bank of England's target – that does not mean average prices have come down, but rather that they are just rising more slowly.

The Resolution Foundation found that a typical low-income family with two children in receipt of Universal Credit would see their annual benefit award rise by £253 next April. However, if it was instead increased in line with its predicted October inflation figure – adding a 0.5 percentage point increase driven by higher energy prices to make CPI 2.2% – the same family would receive £327 instead, a gain of £74.

The major government benefit that avoids this issue is the State Pension. The effect of the State Pension triple lock means that the State Pension is set to rise by 4.1% in April 2025 to match average earnings growth for May-July 2024, more than double the expected the Universal Credit increase.

Lalitha Try, Economist at the Resolution Foundation, said "There was a larger-than-expected fall in inflation last month, but it will rise sharply in October driven by base effects from energy prices. This temporary fall is badly timed for millions of low-to-middle income families as will result in a lower increase in their benefits next year.

"A more timely measure of benefit uprating would deliver a cash gain to a low-income family with kids of around £74 next year.

"The Government needs to address the age divide in benefits which has left working-age support fall further behind rising wages and living standards."