How much will universal credit rise next year after 1.7% inflation?

Inflation reached a three-year low after a surprise fall in September, paving the way for further interest rate cuts.

For millions of people receiving benefits, the September reading paves the way for smaller payment increases.

The government uses September’s inflation rate to calculate how much benefits, including universal credit, should rise by the following April.

However, the larger-than-expected decline in inflation is expected to be a temporary blip, with the CPI rising again towards the end of the year.

While it’s good news for the Treasury Department, which will pay out fewer benefits, claimants will likely see a much smaller increase next year than previously expected.

We look at which benefits and bills are related to inflation and what this means for claimants.

Why are benefits affected by inflation?

Historically, the government has used September’s inflation figures as a base month to increase benefits the following April.

Since 2011, the consumer price index (CPI) has been the standard inflation measure to ensure that benefits remain largely in line with the cost of living.

The weaker-than-expected September figures, driven by a fall in transport prices, mean headline inflation has fallen below the Bank of England’s 2 percent target.

While this is good news for overall costs, millions of benefit recipients will lose out as inflation is expected to pick up again in October.

Because benefits are upgraded based on a lagged measure of inflation, this means that the real value falls when inflation rises again.

In April, the inflation rate could theoretically be much higher than the Bank of England’s target, while benefits rise by just 1.7 percent.

Lalitha Try, economist at the Resolution Foundation, said: ‘This temporary drop is ill-timed for millions of low- to middle-income families as it will result in a lower increase in their benefits next year.’

The foundation’s calculations showed that a typical low-income family with two children receiving universal credit will see their annual benefit increase by £253 in April next year – or just over £20 a month.

If working age benefits were increased in line with October figures, which are expected to be around 0.5 percentage points higher, a family would see their Universal Credit increase by a higher annual amount of £327.

By how much will the AOW increase?

Pensioners will not be as affected by a temporary drop in inflation because the government has committed to the triple lock.

This guarantees that the state pension will rise with inflation, average income or 2.5 percent, whichever is higher.

This year the increase in average wage growth was the highest at 4.1 percent. It means the full new flat-rate state pension is expected to rise to £230.30 per week, bringing the total to £11,975 per year. It represents an annual increase of £473.

The full old basic pension is expected to rise to £176.45 per week, taking it to £9,175 per year.

At the same time, the Chancellor is scrapping the winter fuel payment, worth between £200 and £300, for all pensioners except those eligible for Pension Credit.

“Rachel Reeves could choose to shout about this inflation-lowering boost in her first budget in two weeks’ time… but how long they can deliver on these promises remains to be seen,” said Rachel Vahey, head of public policy at AJ Bell.

‘The state pension is now at a level dangerously close to the frozen personal allowance and should catch up in two years.

‘At that moment something definitely has to be done. But slowing the pace of state pension growth or releasing the personal allowance both seem unlikely.

‘It could be that this fast-approaching crisis means that the government will finally be forced to answer the question of how much the state pension should actually provide, at what age, and how benefits can be sustainably increased each year.’

What other benefits upgrade with inflation?

Benefit increases will affect a wide range of benefits, including both DWP and HMRC-administered payments.

They include all disability benefits, such as Personal Independence Allowance (PIP), Attendance Allowance, Disability Living Allowance and Carer’s Allowance.

Universal credit, one of the most widely claimed benefits, will also rise by 1.7 per cent next April. It represents a significant decrease from the 6.7 percent paid out earlier this year.

Last year the standard universal credit allowance for a couple over 25 rose by almost £40 a month. Next April it will rise by just over £10, according to AJ Bell’s calculations.

A small top-up to universal credit could also reignite the debate over the two-child limit and whether it should be scrapped to help low-income families.

The policy, introduced by the Conservatives in 2017, limits the amount of universal credit given to families with more than two children born after April 2017.

Low-income families typically receive an extra £3,455 a year in universal credit or tax credits for each child they have.

But the two-child limit means claimants will receive nothing for a third or subsequent children born after April 6, 2017.

Critics say it pushes more families into poverty and negatively affects single parents.

What about other bills and train fares?

Inflation has been used to calculate several other bills, including phone and broadband bills, but these tend to use data from later in the year.

In the past, providers have used December inflation data to calculate how much to charge customers, usually with an additional surcharge.

However, new rules mean that from next year companies will no longer be able to hit customers with inflation-related price increases in the middle of a contract.

Instead, phone and broadband companies must prominently display medium-term price increases in pounds and pence.

However, regulator Ofcom has not imposed a limit on the amount these companies could charge, meaning customers face even higher bills.

Train companies have also used inflation to calculate how much they can increase their fares.

Normally, train fares in March increase by the retail price index (RPI) inflation level in July of the previous year, plus or minus up to 1 percent.

In July, the ONS said RPI inflation was 2.2 percent in July, meaning travel companies could increase their fares by up to 3.2 percent in March.