Interest rate hike possible as inflation hits five-year high

Inflation surged to its highest level for more than five years last month, increasing pressure on households and boosting the prospect of an interest rate hike.

Figures from the Office for National Statistics (ONS) showed the Consumer Price Index (CPI) measure of inflation reached 3% in September.

The step-up in CPI was driven by higher food and transport costs, pushing the headline rate to levels not seen since April 2012.

British pensioners received a lift from September’s rise, but cash-strapped households face an even tighter squeeze as the Brexit-hit pound bumps up everyday prices and wage growth tracks behind inflation.

Andrew Sentance, Pwc’s senior economic adviser, said: “This latest rise in inflation will add to the squeeze on the spending power of consumers and is likely to prolong the period of sluggish growth we are currently seeing here in the UK.

“A further rise in the inflation rate later this year cannot be ruled out.

“Relatively high inflation will also add to the pressure on the Bank of England Monetary Policy Committee (MPC) to raise interest rates next month.

“A gradual rise in interest rates would help support sterling and reduce the risk that the current surge in inflation becomes more prolonged and persistent.”