September inflation is more important than most because indexation in Britain’s taxation and social security system is linked to the annual changes this month. The annual change in the retail prices index in September, the traditional UK inflation measure, was -1.4 per cent, the Office for National Statistics said today.
This implies that the Treasury, applying normal indexing rules, should reduce many benefits next year, tax allowances and thresholds, and some indirect tax rates. The government has already said it will not impose normal indexation; it does not want to cut some benefits a month before the expected date of the next election. This will providing pensioners among others with a one-off boost to their real incomes next April.
The most cursory back-of-an-envelope estimates suggest, the unplanned stimulus could be in the range of £5bn. The Treasury is delighted as it can now say with almost a straight face that it is keeping the stimulus going in 2010 even though it plans to raise the rate of value added tax back to 17.5 per cent at the end of the year. But the more intriguing thought is that after next year’s election, clawing this unplanned income boost back through freezing benefits for a short-period would be an obvious way of reducing the deficit.