Inflation held steady at 2.2% in the 12 months to August, in line with expectations, although rising energy costs mean it is likely to accelerate again as we head towards winter.
Core inflation, which strips out more volatile food and energy prices, rose from 3.3% to 3.6%, led by services inflation which jumped from 5.2 to 5.6%.
Meanwhile, the Retail Prices Index (RPI) measure of inflation, which includes housing costs, eased slightly to 3.5% in the 12 months to August, down from 3.6% in July.
The largest upward contribution to the monthly change in inflation came from air fares, which rose this year but fell a year ago; the largest offsetting downward contributions came from motor fuels, and restaurants and hotels. Food and non-alcoholic drink prices slowed to 1.3% in the year to August 2024, down form 1.5% in the year to July. 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: “On the face of it, inflation regained its balance and held steady at 2.2%, after last month’s bump. Dig a little deeper, however, and there’s plenty going on. The Bank of England will have a close eye on core inflation – which climbed faster than a month earlier. We already know there’s more inflation to come, especially after the rise in the energy price cap in October. The question the Bank will be asking is whether this will embed itself in core inflation – which would prove harder to shift.
“Transport helped hold inflation up, with air fares rising an impressive 11.9%. They always rise during August, but this year was particularly striking. This August saw a major getaway, as demand for European travel was boosted by a summer washout at home, and we decided we couldn’t manage an entire summer without seeing the sun. The price of second-hand cars also pushed inflation up, on a monthly basis they managed a small rise, although they’re still 6.6% cheaper than this time last year.”
What inflation means for you
High inflation increases the cost of our general living expenses, making it even harder for those on low incomes to make ends meet, so news that it has held steady at 2.2% in the year to August is positive, although we’re likely to see it rise again when the energy price cap increases in October.
Wage growth continues to outstrip the rate of inflation, with pay including bonuses currently at about 4%.
Inflation and your pension
Although inflation remaining at 2.2% in the year to August will dominate headlines for the next few days, it is actually September’s inflation rate that is usually considered most important. 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 2.5% September’s inflation figure, or earnings growth. Earnings figures for the three months to July are used for the yearly increase, so unless inflation jumps sharply next month, the State Pension is likely to increase by 4%You can find out more about this in our guide What is the pension triple lock?
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “With wage growth streaking well ahead, it seems more and more likely that last month’s 4% figure will be the one used in the triple lock for next year’s state pension increase. It’s next month’s inflation figure that is taken into account for the purposes of the calculation but with inflation taking a more settled pattern we aren’t going to see it shoot up to surpass wages in the next month. This puts pensioners in line for a £460 increase for those on the full new state pension and around £350 for those on a full basic state pension.
“We may still be above the Bank of England’s 2% target but it’s a huge relief to see inflation settling down from the double-digit highs we saw just two years ago. The difficulties pensioners faced in managing their budgets during those difficult times show the importance of taking inflation into account when retirement planning. You could be retired twenty years or more and during that time you could see huge changes to prices, and you need to be prepared.
“If you are in the market for an annuity that increases in line with RPI every year, then a 65-year-old can currently get up to £4,468 per year if they have a £100,000 pot according to the latest data from the HL annuity comparison tool. This is still far lower than the £7,102 available for a single life level annuity so there are careful decisions that need to be made. Do you go for the lower starting income and the knowledge it will increase over time or do you opt for the higher one and hope inflation does not soar?
“There are of course other ways of injecting a bit more flexibility into your plan. You don’t have to annuitise your whole pension on one day. Instead, you can annuitise in stages throughout your retirement. This gives you the potential to leave part of it invested where it can grow further. You will also benefit from higher annuity rates as you age, which will boost your income. To make sure you get the best deal for you it is vital to use an annuity comparison tool to shop around the market to make sure you’ve got the best rate.”
You can find out more about how different types of annuity work in our guide Annuities explained and about while it’s vital to do plenty of research before buying one in our guide Why it pays to shop around for your annuity. If you want to learn more about the impact of inflation on your retirement savings, read our article How does inflation affect my pension?
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,250 reviews on VouchedFor, the review site for financial advisors.
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%. With August’s inflation number holding steady at 2.2%, many are expecting that well see the next rate cut in November rather than this month, although it is by no means a foregone conclusion.
Alice Haine, personal finance analyst at BestInvest by Evelyn Partners, the wealth manager, said: “For homeowners and first-time buyers, stable inflation combined with slightly more competitive mortgage rates means affordability levels are improving for those shopping around for a new home as their money can stretch that little bit further.
“Those pinning their hopes on a second rate reduction to ease their borrowing woes are likely to take some comfort from the number of major lenders already rolling out mortgage
rate cuts. The number of sub 4% fixed rate deals available is on the rise, with some lenders even extending this to two-year fixes, as competition heats up. A surprise interest rate reduction tomorrow could catalyse the mortgage market even further with rates falling at an even faster pace.”
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.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
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.
Tom Stevenson, investment director at Fidelity International, said: “The mixed messages in today’s inflation data underline the challenge the Bank of England faces in setting monetary policy in a less stable and predictable environment for prices. With the new Labour government pushing for higher growth and productivity, and without the stabilising forces of globalisation, cheap energy and EU membership, inflation is likely to be more volatile in future.
“However, the direction of travel for UK interest rates looks set even if the timing of rate cuts is not. With growth stagnating over the summer and headline inflation remaining close to target, the next cut looks nailed on for November, even if it does not come tomorrow. That should keep a lid on the pound, whether the Federal Reserve opts for the expected quarter point rate cut this week or the jumbo half point cut that remains a possibility.
“For investors, the window of opportunity to lock in higher interest rates on cash is starting to close.”
There are plenty of competitive savings accounts to choose from, despite rates easing in recent weeks.
Sarah Coles said: “You can still get 5% or more in couple of easy access accounts. However, with more cuts on the cards, it’s time to take stock of whether you actually need all this money close to hand. You should have easy access savings to cover 3-6 months’ worth of essential spending while you’re working age and 1-3 years’ worth in retirement, but for any cash you’re holding beyond this, it’s worth considering tying it up for the periods that make the most sense for your finances.
“There are some really strong deals around, especially on short-term fixed rates, so you can still lock in a great rate. Don’t feel you have to pick a single account. If you need sums at various points over the next five years, you can take a mix-and-match approach, using different banks, savings accounts and cash ISAs for different periods, to build the savings mix that suits you.”
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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