CPI September 2021: what is UK consumer price index - and link to cost of living, pensions and interest rates

The latest Consumer Price Index (CPI) figures for September 2021 have been released by the Office of National Statistics (ONS).

The CPI, which measures the average change in prices that consumers pay for a basket of goods and services, is used to assess the cost of living.

Households have recently had to shoulder an increase in energy bills due to a rise in wholesale gas prices, at a time when petrol prices at the pump have soared.

But what does it all mean to the cost of living, pensions and interest rates. Let’s find out.

What is the latest CPI?

Data from the ONS shows that the CPI rose by 3.1% in the 12 months to September 2021.

This is down from 3.2% in August but sees a 0.3% month to month increase compared to a rise of 0.4% in September 2020.

What does the CPI mean for the cost of living?

There has been an increase in prices to clothing and footwear, housing and household services, recreation and culture, and furniture and household goods, say the ONS.

It means the cost of living has gone up slightly in the last month and more so than a year ago - and £1 doesn’t stretch as far as it used to, with a risk of lowering living standards.

Is the CPI linked to pensions?

Pensioners or people nearing retirement age are keeping a close eye on the CPI.

The CPI forms part of the so called triple lock - a guarantee from the UK government to safeguard the value of pension pots over time.

The triple lock means the state pension will be increased by whichever is highest - average earnings, inflation based on the CPI or 2.5%.

Chancellor Rishi Sunak has already shelved the triple lock in 2022 as the country grapples with the cost of the Covid pandemic to the public purse.

Instead, pension increases will be determined by either the CPI or 2.5%, whichever is higher.

A 3.1% increase in pensions would still be the third highest uprating in the decade long history of the triple lock, beaten by the 5.2% CPI boost in 2012/13 and 3.9% earning rise in 2020/21.

What will happen to interest rates?

Interest rates are expected to rise in 2022 as the Bank of England reduces the rate of inflation.

Inflation, currently 3.1%, is expected to reach 5% before the end of the year - way above the BOE’s 2% target.

In order to bring inflation down, interest rates tend to go up.

If the base rate increases, with some experts suggesting it will in 2022, then the cost of borrowing will increase, a cost which will be passed on to those borrowing.

It means that tracker mortgages offering low interest rates will be susceptible to any change to the base rate while anyone remortgaging on a fixed term deal might be offered higher interest rates than they initially thought.

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