Inflation: Rise in cost of living slows in September

Price rises dipped slightly in September as the economy continued to reopen, according to official figures.

The increase in the cost of living, as measured by the Consumer Prices Index, fell to 3.1% in the year to September, down from 3.2% in August.

Higher prices for transport were the biggest contributor to price rises.

It comes after the Bank of England warned it "will have to act" over rising inflation, suggesting interest rates may rise soon.

The inflation rate fell back slightly last month, partly due to lower prices in the hospitality sector.

Prices in restaurants and cafes rose less this summer than the last, when the government's Eat Out to Help Out Scheme was running, the Office for National Statistics said.

Under the scheme, diners got a state-backed 50% discount on meals up to £10 each on Mondays, Tuesdays and Wednesdays.

Mike Hardie, head of prices at the ONS, said: "However, this was partially offset by most other categories, including price rises for furniture and household goods and food prices falling more slowly than this time last year.

"The costs of goods produced by factories rose again, with metals and machinery showing a notable price rise. Road freight costs for UK businesses also continued to rise across the summer."

What is inflation?

Simply put, inflation is the rate at which prices are rising - if the cost of a £1 jar of jam rises by 5p, then jam inflation is 5%.

It applies to services too, like having your nails done or getting your car valeted.

You may not notice low levels of inflation from month to month, but in the long term, these price rises can have a big impact on how much you can buy with your money.

Read more about inflation here.

Why are prices rising?

Although price rises edged lower in September, the increase of 3.1% remains far above the Bank of England's target of 2%.

Last month, transport costs made the biggest contribution to price increases.

Average petrol prices stood at 134.9 pence a litre, compared with 113.3 pence a litre in September of 2020, when travel was reduced under travel restrictions.

The ONS added that the September 2021 price for fuel was the highest recorded since September 2013.

A rise in used car prices, which were 2.9% higher in September than in August, also contributed to higher transport costs.

Other factors such as demand for oil and gas rising around the world have pushed up the price of energy.

Meanwhile, there are shortages and bottlenecks affecting the availability of some important goods like computer chips, which are also increasing costs for businesses.

• Why is the cost of living going up?

• Bank of England says it will act on inflation

• Food price rises are terrifying, warns industry

Suren Thiru, head of economics at the British Chambers of Commerce, said that further price increases were expected in the coming months "with the increase in the energy price cap, partial reversal of the VAT reductions for hospitality and tourism and persistent supply chain disruption".

He warned that rising inflation could disrupt UK's economic recovery by squeezing people's spending power and companies' profit margins.

How will it affect me?

Everyone is affected by rising costs, but if you're on a low income or don't have savings to fall back on, you're more likely to feel the impact.

And if your pay isn't going up in line with price rises, you may notice a fall in the "real value" of your wages - what you earn buys less.

"We're just starting to notice the pinch a little bit," Ruth Holroyd told BBC Breakfast. She usually takes on the task of doing the family's weekly shop.

"I've noticed that the prices are higher for the overall shop, but where prices stay the same for things like grapes and strawberries that come in a punnet, the punnets have shrunk, so you don't get as much."

She is mostly worried about the impact of rising energy bills. She was previously a People's Energy customer, but the firm ceased trading earlier in September, collapsing because of rising gas prices.

Ruth expects that the family's energy bill will double from £120 to £250 per month.

Is inflation a cause for concern?

A bit of inflation is considered to be a good thing. If prices were falling, then people might delay buying non-essential items in the hope of getting them cheaper.

But if prices rise too quickly, it's seen as a sign that the economy is running into difficulties.

Business Secretary Kwasi Kwarteng told BBC Breakfast on Wednesday that price rises were a "a real cause of some concern", adding that the government wanted inflation rates to be lower.

He suggested that price increases were partially due to higher demand as the economy reopens.

"When you see quite strong economic growth, there is always the danger you will have inflation. Now the critical question is, how long is that inflation going to last for?" he said.

He added that he had recently spoken with the governor of the Bank of England and that it was "hopeful" price rises would be contained.

Referring to the new figures out on Wednesday, Liz Martins, senior economist at HSBC, told the BBC's Today programme: "We can't stand down our concerns about inflation just because this number was a bit lower than expected.

"Since September, there's been a big rise in natural gas prices, a rise in petrol prices and global oil prices and from the Bank of England's point of view, we've also seen more people start to get worried about inflation."

She warned that the economy was not "out of the woods yet".

What can the Bank of England do to target inflation?

Bank of England governor Andrew Bailey warned on Sunday that the Bank of England "will have to act" over rising inflation.

The Bank has already said UK inflation is set to exceed 4% before falling back as the economy recovers from Covid.

Governor Andrew Bailey's warning on Sunday is seen as his clearest hint yet that interest rates will rise.

The UK's central bank can raise interest rates in a bid to tackle inflation if prices are rising quickly. In principle, it means that when borrowing costs rises, such as when mortgages become more expensive, people spend less and prices are driven down.

Investors are expecting interest rates to be raised later this year or early in 2022, in an effort to bring inflation back down to the Bank's2% target.

However, he gave no suggestion of when the Bank might increase rates from the current record low of 0.1%.

The governor said that rising energy bills could push inflation higher for longer than previously thought.

The slight easing of inflation in September comes more as a temporary respite in the surging cost of living than a sign that it's over.

Last month's figures compared August with a year before, when prices in restaurants and hotels were artificially low because of the government's Eat out to Help Out scheme. This month's figures, by contrast, compare prices now with where they were in September 2020, when the scheme was no longer operating.

The average rise in the cost of living of 3.1% masked sharp price rises in items such as air fares, up 9.7%, or carpets, up 9.6%.

And there are signs of further inflationary pressure coming down the line, with manufacturers paying 11.4% more for raw materials and prices of goods leaving the factory gate up 6.7% - the biggest rise in a decade.

An interest rate rise by the end of the year, with rates continuing to rise in the new year, still looks more likely than not.