Inflation remained at 3.8 per cent in the year to September for the third month in a row, according to figures released by the Office for National Statistics (ONS) on Wednesday.
The Consumer Prices Index (CPI) measure of inflation released today is still well above the Bank of England’s 2 per cent target.
However, the figure is lower than what economists had predicted, with several experts predicting an increase to 4 per cent.
The ONS said the biggest contributor towards inflation was transport whilst food and non-alcoholic beverages made the largest offsetting downward contributions.
Grant Fitzner, chief economist at the ONS, said: “A variety of price movements meant inflation was unchanged overall in September.”
Core inflation, which excludes volatile measures like food and energy prices, was 3.5 per cent, which was also below economist expectations and a slowdown on the previous month’s reading of 3.6 per cent.
Services inflation, which measures the general increase in prices for services rather than physical goods and is closely watched by the Bank of England, was 4.7 per cent, also below expectations of 4.8 per cent.
Rachel Reeves said: “I am not satisfied with these numbers. For too long, our economy has felt stuck, with people feeling like they are putting in more and getting less out.
“That needs to change. All of us in Government are responsible for supporting the Bank of England in bringing inflation down.”
What will happen to inflation in the future
Inflation is widely expected to stay high this year, but some think it will have peaked in September.
Capital Economics noted that the 2 per cent month-on-month drop in Ofgem’s utility price cap on 1 October, combined with what could be a 3.4 per cent fall in fuel prices in response to lower oil costs, should help ease pressures in the months ahead.
However others, such as economist Andrew Sentance, believe it could go higher than 4 per cent, potentially to 5 per cent.
The Bank expects it to stay above the 2 per cent target level for another two years, until 2027.
What does higher inflation mean for interest rates?
Higher inflation means prices are rising quicker, and this can prompt the Bank to keep interest rates raised for longer.
Interest rates are currently at 4 per cent after being cut in early August.
Even though inflation is still well above the Bank’s 2 per cent target, there is a chance interest rates could be cut again later this year, although this hangs in the balance.
Following the release on today’s inflation figures, investors are betting there would not currently be another cut this year – but this could change based on following economic data.
Many believe the next reduction will come in 2026.
What does this mean for mortgages, savings and pensions?
Mortgages
Mortgages are not directly affected by inflation, although many products are affected by the Bank’s base rate, which inflation influences.
Tracker products and standard variable mortgages change directly when interest rates change.
Fixed mortgages tend to follow swap rates, which work on long-term predictions for where the base rate will go.
Mortgage rates are broadly expected to fall modestly this year, though if inflation continues to rise and we do not get any interest rate cuts, that could become less likely.
Rachel Geddes, strategic lender relationship director at Mortgage Advice Bureau, said: “While inflation holding steady reflects the persistent pressures from political uncertainty and elevated costs, the mortgage market continues to remain resilient. In fact, many don’t realise they’re now in a prime position to get onto the property ladder – especially compared to this time last year, or even six months ago.”
Savings
High inflation is bad news for savers as it erodes the value of money held in the bank. Therefore, the lower the rate, the better the news for savers.
The effects of inflation on the Bank’s interest rate also affects savers, because of the base rate’s influence on savings rates. Savings rates have dropped in recent months, though it is possible to bag a deal that beats inflation.
For example, Chase offers an easy-access account worth 4.5 per cent for current account holders – well above inflation – though this includes a temporary bonus rate.
Trading 212 offers a cash ISA account paying 4.51 per cent, though this also includes a temporary bonus.
Pensions
Higher inflation can eat into pensioners’ savings.
For example, if you are 67 and plan to retire in a year, assuming you have a pot of £87,500 in today’s money – roughly the average an over-50 will have by retirement, according to Pension Bee – then one year later, if inflation runs at 3 per cent, and your investment growth is 3 per cent, your pot would be worth £90,125.
But in real terms, it would be worth exactly the same as it is today, because inflation has eaten away at the potential growth.
Another factor to be aware of is the impact of inflation on annuity rates.
Annuities offer a guaranteed annual income in retirement. They offer an alternative to drawing down money from a pension pot, which could eventually run out, particularly if a retiree lives longer than expected.
When interest rates fall, this reduces the annual incomes someone can buy.