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Inflation rose to 3.5% in the 12 months to September, up from 3.1% in August, according to the latest data from the Office for National Statistics (ONS), driven by the surging cost of motor fuel.
Core inflation, which strips out more volatile food and energy prices, accelerated to 2.8% in September, up from 2.6% in August, while services inflation increased to 3.7%, up from 3.4% in August. Food inflation remained unchanged at 1.3%. You can read about some of the ways you might be able to reduce your food costs in our guide 21 ways to save money on your food bills.
Meanwhile, the Retail Prices Index (RPI) measure of inflation, which includes housing costs, rose to 3.9% in the 12 months to September, up from 3.4% in August.
Susannah Streeter, Chief Investment Strategist, Wealth Club, said: “The heat is on, with UK inflation turning steamier again. Price growth is accelerating once more, as the economic fallout from the war in Iran continues to seep through the economy.
“The CPI reading came in higher than expected, rising to 3.5%, and this sobering snapshot for September is expected to be part of a trend of higher inflation through to the start of next year, given how energy prices are staying unrelentingly high.
“The shockwaves from higher oil and gas prices are still working their way through supply chains, with motorists feeling particular pain at the pumps. While food prices have remained more stable, with companies absorbing rising costs, the worry is these can’t be contained for much longer and will soon be passed on to consumers.”
What higher inflation means for you
When inflation rises, this means household living costs are increasing at a faster rate than previously. News that the CPI rate has gone up to 3.5% in the year to September is therefore unwelcome, and it remains well above the government’s 2% target.
However, wage growth continues to outstrip the rate of inflation, at an annual rate of 3.7% for the three months to August for both regular earnings (excluding bonuses) and total earnings (including bonuses).
Kevin Mountford, founder of savings platform Raisin UK, said: “With the Chancellor set to announce decisions on tax and public spending next week, the focus will be on how households manage their money if essential costs continue to rise.”
Inflation and your pension
September’s inflation number is considered the 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 this stands at 3.9%, which is higher than September’s inflation number, that means that the State Pension will rise by this amount in April 2027, taking the new State Pension to around £13,036 a year. You can find out more about this in our guide What is the pension triple lock?
Jon Greer, head of retirement policy at Quilter, said: “This will be welcome news for millions of retirees, particularly after another year in which many household budgets have remained under pressure. However, this increase carries significance beyond next year’s uplift alone. While the triple lock may now have an expiry date, it has not finished boosting pensioners’ incomes just yet.
“Andy Burnham has confirmed that the triple lock will be replaced from 2030 with a guarantee based on the higher of inflation or 2.5%, alongside a longer-term earnings link that has yet to be set out in detail. While that new framework is likely to be less generous than the current system, if earnings continue to outpace inflation over the next few years, pensioners could still benefit from further meaningful increases before the reforms take effect. In that sense, the impact of the earnings link will continue to be felt long after the current version of the triple lock has gone.
“The real question now is what comes next. The State Pension remains a crucial source of income for millions of retirees. Our latest Retirement Lifestyle Report shows it accounts for almost a quarter of retirement income on average, while among retirees aged 65 to 79 with incomes of £25,000 or less it provides 57% of their retirement income. For over-80s on below-average incomes, it accounts for 54% of what they live on.
“Equally significant is the fact that this latest increase means the full new State Pension will exceed the personal allowance for the first time. The government has committed to ensuring pensioners whose only income is the State Pension do not pay income tax, but we are still waiting for detail on exactly how that will work in practice, which we understand will be confirmed in the Budget.”
Whilst the increase in the State Pension is positive, higher inflation generally is bad news for pensioners who need to make sure their pension lasts throughout their retirement, and the fact that it is likely to rise further in the coming months is worrying for many.
Sales of annuities have surged in recent months, with growing numbers of savers looking for a guaranteed income in turbulent times.
Adam Cole, retirement specialist at Quilter, said: “Against a backdrop of market volatility, inflation uncertainty and concerns about making retirement savings last, it is perhaps unsurprising that more people are choosing to lock in a secure income stream for life rather than take on all the investment and longevity risk themselves.”
Latest data from Hargreaves Lansdown’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £8,146 per year from a single life level annuity, with a five-year guarantee.
Inflation-linked products are also available, and one that rises by 3% per year can give a starting income of up to £6,094 per year at the age of 65 based on the same sized pension pot. As this is considerably lower than a level product, you do need to consider how long it will take the income to catch up to that of a level product.
You can find out more about annuities in our guide Annuities explained and about drawdown in our article What is pension drawdown and how does it work? If you want to learn more about the impact of inflation on your retirement savings, read our article How does inflation affect my pension?
Impact on savers
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.
Savings rates have risen in recent weeks, so it’s worth checking how much interest your savings are earning and switching to a higher-interest-paying account if one is available.
Kevin Brown, savings expert at Scottish Friendly, said: “For consumers, making sure savings are earning a competitive return after inflation, building a financial buffer where possible, and considering longer-term investing when it makes sense to do so remain sensible ways to protect their finances.”
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 article How to save money – 21 money saving tips.
Free financial support services
Millions of people are struggling financially at the moment, and inflation ticking up makes it even more difficult for many 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)
Mr Brown said: “The worry is that the longer the Middle East conflict continues, the greater the risk that elevated energy and fuel costs feed through into the price of other everyday goods and services, placing even more pressure on household budgets going into the winter.”
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