Inflation jumped to 2.3% in the 12 months to October and is now back above the Bank of England’s 2% target.
Core inflation, which strips out more volatile food and energy prices, rose from 3.2% to 3.3%, while services inflation increased from 4.9% to 5%.
Meanwhile, the Retail Prices Index (RPI) measure of inflation, which includes housing costs, increased to 3.4% in the 12 months to October, up from 2.7% in September.
The largest upward contribution to the monthly change in inflation came from October’s increase in the energy price cap, steeper air fares and higher food costs, with the largest offsetting downward contributions coming from motor fuels. You can learn about ways you might be able to reduce your food bills in our guide 21 ways to save money on your food bills.
Sarah Coles, head of personal finance, Hargreaves Lansdown said: “This month’s unwelcome return above the inflation target is unlikely to be a one-off: inflationary pressures look set to keep prices rising more quickly. The good news is that public sector pay rises and the rise in the minimum wage should help ease the immediate pain of higher prices for some people. The bad news is that this could end up feeding into higher prices further down the line, spurring another round of inflation. Retailers are also warning that higher National Insurance could power price rises, and with inflationary pressure building, rate cuts might be off the agenda for a while yet.”
What inflation means for you
When inflation rises, this pushes up the cost of living for households making it more difficult for those on low incomes to make ends meet. News that it has risen to 2.3% in the year to October is therefore unwelcome, especially as it has again exceeded the government’s 2% target.
Wage growth continues to outstrip the rate of inflation, with pay including bonuses currently at about 4.8% in the three months to September.
Inflation and your pension
September’s inflation number is usually the considered most important inflation rate of the year for those reliant on the State Pension. That’s because the increase in prices over the year to this point is usually used to calculate the rate at which certain allowances and benefits, including the State Pension, are increased the following April.
Under the ‘triple lock’ guarantee, the State Pension is guaranteed to rise by the highest of September’s inflation figure, earnings growth, or 2.5%. Earnings figures for the three months to July are used for the yearly increase, and given that these stood at 4.1%, that means that the State Pension is due to increase by this amount next April, meaning an annual rise of around £473 for those receiving the new State Pension and £361 for those on the basic State Pension. You can find out more about this in our guide What is the pension triple lock?
However, October’s inflation figures will have an impact on pensioners, who often have to get by on low incomes.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Inflation has bounced back above the Bank’s 2% target in October. Compared to recent history, the bounce is not a big one, but it shows the need to keep a keen eye on the impact of price rises on stretched budgets.
“Pensioners will feel this particularly keenly. Many will have lost the Winter Fuel Payment this year and will have to wait until April for their state pension to increase. It’s hugely important that their pensions are able to fill these gaps, because over a retirement that could last twenty years or more, there is a strong likelihood of experiencing a period of high inflation at some point.”
If you want to learn more about the impact of inflation on your retirement savings, read our article How does inflation affect my pension?
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What does it mean for interest rates?
The Bank of England raised the base rate fourteen consecutive times since December 2021 to try to dampen inflation, and made its first base rate reduction for over four years in August, taking the rate from 5.25% to 5%, followed by a further cut in November which means the base rate currently stands at 4.75%.
Alice Haine, personal finance analyst at BestInvest by Evelyn Partners, the wealth manager, said: “Homeowners and first-time buyers are likely to be disheartened by the latest inflation reading, as it reduces the likelihood of a third rate cut this year. The average cost of a new fixed-rate mortgage has been creeping up since the Budget, as lenders price their products to reflect expectations that interest rates may stay higher for longer.
“With the latest inflation reading confirming that inflation has not only risen back above the BoE’s 2% target but has come in higher than expected, it means that mortgage borrowers could have more pain to contend with if more lenders adjust their rates upwards.”
If you’re worried about a potential payment shock when your current mortgage deal ends, read our articles When is the best time to remortgage? and Are you one of 1.6m homeowners facing a mortgage timebomb?
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
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Impact on savers
When inflation is lower this benefits savers as it makes it easier to generate real returns. If you’re trying to save so that you have a financial buffer in place to cover rising costs, our articles How to build an emergency fund and Best instant access savings accounts may come in handy.
Ed Monk, associate director at Fidelity International, said: “Higher inflation is a blow to savers and investors, too, who will see the real return they achieve fall. Savers have enjoyed an extended period where interest has exceeded price rises, and fund purchases by our clients demonstrate this appetite for cash and cash-like assets, with cash and short-maturity bond funds featuring highly in the list of best-sellers this year. Inflation-beating interest on cash will no doubt have likely tempted some investors to move money from investments into savings accounts.
“That appeal is eroded by higher inflation, even if cash interest is likely to exceed inflation for a while longer. Meanwhile, there are signs that cuts to interest rates – including cash interest – may not be as rapid as recently expected. In that context, it may be time to rebalance your allocation of cash versus investments.” It’s worth reviewing any cash savings you have so you can be certain you’re earning as much interest as possible.
Mark Hicks, head of Active Savings at Hargreaves Lansdown said: “Savings rates have fallen significantly over the past twelve months on the back of lower inflation and lower central bank rates. But this isn’t a straight line. Over recent weeks and months, inflationary expectations have built both in the US and the UK, which has been better news for savings.
“It means that while the easy access market has fallen in line with Bank of England base rate reductions, fixed terms have stayed relatively stable. Banks always have one eye on rates in the future when deciding what fixed deals to offer, so growing indications that rates could stay higher for longer have ensured they remain rewarding. With plenty of savings accounts still offering over 4.5%, cash is still a very attractive asset class. Indications that inflation is set to be above target for some months mean there’s less chance of multiple base rate reductions, so savings rates should remain relatively stable into the year end.”
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You can learn more about inflation and the impact it has on your finances in our guide What does inflation mean for my money? If you’re looking for ways you might be able to reduce your outgoings, read our articles How to save money – 21 money saving tips and Seven ways to save on your household bills.
Free financial support services
Millions of people are struggling financially at the moment, and although inflation is easing, many are still finding it difficult to manage their outgoings.
If your debts are starting to spiral out of control, contact Citizens Advice to help you find a way forward. You can speak to an advisor through its national phone service Adviceline on 0800 144 8848 if you’re in England, 0800 702 2020 if you’re in Wales, 0800 028 1456 if you’re in Scotland and 0808 223 1133 if you’re in Northern Ireland. Alternatively, contact any of the following specialist debt advice charities:
- National Debtline (telephone 0808 808 4000)
- Debt Advice Foundation (telephone 0800 043 4050)
- StepChange (telephone 0800 138 1111)
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