Inflation fell to a lower-than-expected 4.6% last month, its lowest level since 2021, but raising questions about the expected increase in the state pension.

The drop from 6.7% in September has been driven by energy prices falling out of the inflation calculation.

Steven Cameron, pensions director at Aegon, said the figure shows the Government has delivered on its promise to halve inflation from its 10.7% starting point by the year end.

But he said it piles pressure on the Government as it considers whether or not to honour the triple lock on pensions in full next April.

The official formula would grant an 8.5% increase, based on year-on-year earnings growth for the May to July period. But Chancellor Jeremy Hunt is said to be considering taking out ‘distortions’ around public sector bonuses and trimming it back to 7.8% which would save the Government billions.

An 8.5% increase would see the New State Pension jump by £901.02 to £11,501.22 a year. The ‘old’ State Pension, for those who reached State Pension age before 6 April 2016, would also rise by £690.40 to £8,812.80

“The headline rate may fall even further as we head into the early months of 2024,” said Mr Cameron. “This means there’s a real chance that a State Pension increase of 8.5% could be more than double the ruling rate of inflation come next April. That’s unsustainable

“Whatever the decision for next April, volatile price inflation and earnings growth add to growing concerns that the Triple Lock in its current form is unsustainable longer term.”

While the inflation figure was hailed as achieving the Prime Minister’s pledge, Huw Pill, chief economist at the Bank of England, said it was more likely that inflation would remain stubbornly above its official 2% target and this was not a reason for rate-setters to begin easing monetary policy buy cutting interest rate.

The ONS reported earlier this week that the pace of wage growth was running at 7.7%.

Options for investment

The lower inflation figure will provide some respite for the Chancellor ahead of next week’s Autumn Statement when he is expected to announce a number of tax reliefs and other measures to help stimulate the economy.

A group of investors, brokers, City grandees and chief executives have called on Mr Hunt to launch a “British ISA” as an incentive for savers to support UK-listed companies.

They say a dedicated British account would help allow some of the £70 billion invested each year to be directed into the tax-efficient savings regime “to work on behalf of the UK”.

“A new British Isa would give taxpayers the chance to invest their full £20,000 allowance in growing the UK economy and supporting her companies … reviving interest in raising equity in the UK, driving economic growth, spreading prosperity and boosting tax revenues,” they say in an open letter to the Chancellor.

The letter was co-ordinated by BGF, the venture capital investor owned by high street banks, and Singer Capital Markets, an investment bank. It has 93 signatories.

Sceptics say the extent to which the idea would boost the UK economy may be open to question, since UK-listed companies are often not focused on Britain.

Boost for retail

Retailers are hoping lower inflation will provide a much-needed pick-me-up following a slowdown in spending caused by a combination of poor weather and cost of living pressures.

When adjusted for inflation, total shop sales in Scotland fell by 2.3% in October on the same month last year.

David Lonsdale, director of the Scottish Retail Consortium, said: “Severe storms and repeated deluges and disruptions combined with lingering cost-of-living concerns to put a real dampener on Scottish retail sales last month.

“It was a miserable start to retail’s golden quarter. The significant weakening was the poorest monthly performance since July and a fourth consecutive month of real terms decline in the value of retail sales.”