After an unexpected decline in September, inflation reached its lowest level in three years, which enabled further interest rate cuts.
For millions of people receiving benefits, the September reading paves the way for smaller benefit increases.
The government uses September inflation data to calculate how much benefits, including universal credit, should increase by April next year.
However, the larger-than-expected drop in inflation is expected to be temporary, and the CPI is expected to rise again by the end of the year.
Falling inflation: CPI fell below the 2% target in September, meaning benefit claimants expect smaller increases in payouts
While this is good news for the Treasury, which will pay out fewer benefits, claimants are likely to see much smaller increases next year than previously expected.
We look at what benefits and bills are linked to inflation and what this will mean for claimants.
Why does inflation affect benefits?
Historically, the government has used the September inflation reading as a base month to increase benefit payments in April of the following year.
Since 2011, the default measure of inflation has been the Consumer Price Index (CPI), which is intended to ensure that benefits are maintained at levels broadly in line with the cost of living.
A weaker-than-expected reading in September, driven by a fall in transport prices, means headline inflation has fallen below the Bank of England's target of 2%.
While this is good news on overhead costs, millions of benefit recipients are certain to lose out as inflation is expected to rebound in October.
Because benefits are increased using a lagged measure of inflation, this means that the real value falls when inflation rises again.
By April, the inflation rate could theoretically be well above the Bank of England's target, while benefits will increase by just 1.7%.
Lalitha Try, an economist at the Resolution Foundation, said: “This temporary decline comes at a bad time for millions of low- and middle-income families because it will result in lower increases in their benefits next year.”
The foundation's calculations showed that in April next year, the typical low-income two-child family receiving Universal Credit will see their annual benefits increase by £253 – or just over £20 a month.
If working-age benefits were increased in line with the October readings, which are widely estimated to be higher by around 0.5 percentage points, the amount of universal family credit would increase by a higher annual amount of £327.
How much will the state pension increase?
Pensioners will not feel such a temporary drop in inflation because the government has committed to: triple locking.
This ensures that your state pension will increase by inflation, average earnings or 2.5%, whichever is higher.
This year, the increase in the dynamics of the average salary was the highest, amounting to 4.1%. This means the full new flat-rate State Pension is expected to increase to £230.30 a week, making a total of £11,975 a year. This represents an annual increase of £473.
The full old basic state pension is expected to increase to £176.45 a week, rising to £9,175 a week.
At the same time, the Chancellor will abolish the £200 to £300 winter fuel surcharge for all pensioners except those who qualify for Pension Supplement.
“Rachel Reeves may be shouting about inflation-beating budget increases in her first budget in two weeks… but only time will tell how long they can keep those promises,” says Rachel Vahey, director of public policy at AJ Bell.
“The state pension is currently dangerously close to the frozen tax-free allowance and should exceed it in two years.
At this point something definitely has to give. However, both a slowdown in state pension growth and an unfreezing of the personal allowance appear unlikely.
“It is possible that this rapidly approaching critical moment means the government will finally be forced to address the issue of how much the state pension should actually offer, at what age and how it can sustainably increase benefits each year.”
What other benefits increase with inflation?
The benefit increase affects a wide range of benefits, including both DWP and HMRC-administered payments.
These include all incapacity benefits such as Personal Independence Allowance (PIP), Carer's Allowance, Disability Living Allowance and Carer's Allowance.
Universal credit, one of the most sought after benefits, will also increase by 1.7% in April next year. This represents a significant decrease compared to the 6.7% amount paid earlier this year.
| Standard Universal Credit allowance | Current monthly magazine | Expected growth of 1.7% | April 2025 after expected monthly increase (£) | Increase in April 2024 |
|---|---|---|---|---|
| Single under 25 | £311.68 | £5.30 | £316.98 | £19.57 |
| Single over 25 | £393.45 | £6.69 | £316.98 | £24.71 |
| Common under 25 years of age | £489.23 | £8.32 | £497.55 | £30.72 |
| Common people over 25 | £617.60 | £10.50 | £628.10 | £38.78 |
| Source: Department for Work and Pensions, AJ Bell. Based on an expected increase in standard Universal Credit allowances of 1.7% from April 2025, rounded up to the nearest penny. | ||||
Last year the standard universal credit allowance for couples over 25 rose by almost £40 a month. According to AJ Bell's calculations, it will increase by just over 10 pounds next April.
A small rise in universal credit could also reignite the debate over the two-child benefit cap and whether to remove it to help low-income families.
A 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.
However, the two-child limit means that applicants will not receive more for a third or subsequent children born after April 6, 2017.
Critics say it pushes more families into poverty and adversely affects single parents.
What about other bills and train tickets?
Inflation has been used to calculate various other bills, including phone and broadband charges, but these calculations typically use data from later in the year.
In the past, providers used December inflation data to calculate how much to charge customers, usually at an additional cost.
However, the new rules mean that from next year, companies will no longer be able to hit customers with inflation-related price increases during the term of their contract.
Instead, telecoms and broadband companies must see medium-term price increases in pounds and pence in a visible way.
However, regulator Ofcom placed no cap on the fees these companies could charge, meaning customers could face even higher bills.
Rail carriers also used inflation to calculate how much they could raise their fares.
Typically, train ticket prices increase in March by the retail price index (RPI) inflation rate of the previous July, plus or minus up to 1 percent.
In July, the ONS reported that July RPI inflation was 2.2%, i.e. travel agencies could increase ticket prices by up to 3.2% next March.
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