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Inflation rose to 3.1% in the 12 months to August, up from 2.9% in July, according to the latest data from the Office for National Statistics (ONS), with steeper petrol and diesel prices behind the increase.
Core inflation, which strips out more volatile food and energy prices, held steady at 2.6% in August, the same as in May, June and July, while services inflation remained at 3.4%, the same as in July. Food inflation eased to 1.1% in August, down from 1.3% in July, and its lowest level since September 2021.
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 3.4% in the 12 months to August, up from 3.2% in July.
Kevin Brown, savings specialist and Scottish Friendly, said: “Everyday expenses remain stubbornly high for many. With inflation now gaining momentum again, today’s rise will likely be another worrying development for households already dealing with elevated living costs.
“When prices rise faster, household budgets have less room to absorb other costs and wages do not stretch as far. The Bank of England will take that into account ahead of its next interest rate decision tomorrow.
“Today’s reading supports policymakers who believe interest rates need to be higher. Although wage growth is not accelerating, data released yesterday showed the labour market remains subdued.
“And even though higher interest rates cannot directly bring down externally driven energy price rises, another rise in inflation leaves the Bank with much less room to look past those pressures and increases the risk that borrowing costs stay higher for longer.”
What inflation means for you
When inflation rises, this means household living costs are increasing at a faster rate than previously. News that it has gone up to 3.1% in the year to August is therefore unwelcome, and it remains well above the government’s 2% target.
Wage growth continues to outstrip the rate of inflation, at an annual rate of 3.9% for the three months to July.
Alice Haine, head of personal finance, Hargreaves Lansdown, said: “It’s back to school with a sting in its tail for households as the traditional September reset gets off to a rocky start. This is the time when many are looking to trim spending and boost savings in the run-up to Christmas. Rising prices, particularly on fuel and energy, make that considerably harder, with more income swallowed up by essential bills, leaving less room to save and invest for the future.”
Inflation and your pension
September’s inflation number is usually 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%, that means that the State Pension is expected to 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?
Higher inflation 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.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “Next month’s inflation figure is the final piece in the triple lock puzzle and, barring a real surge, we’re likely to see average wage data delivering an inflation-busting increase of 3.9% next April.
“Such an increase would put someone on the full new state pension on course to receive £250.70 per week from next April, up from £241.30. Someone on a full basic state pension would receive £192.10 per week – up from £184.90.
“It’s a good foundation, but it will only cover the basics and the HL Savings and Resilience Barometer shows that only 43% of households are currently on track for an adequate retirement income.
“If you want more from your retirement years, such as travel and days out with loved ones, then you need to make the most of your pensions to build a good level of retirement income. Check to see if you can increase your contributions and whether your employer can increase theirs in turn. Even making small steps can make a huge difference.”
Retirees on the lookout for a guaranteed income will find annuities continue to offer good value. The latest data from Hargreaves Lansdown’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £8,030 per year from a single life level annuity, with a five-year guarantee.
Inflation-linked products are also available – one that rises by 3% per year can give a starting income of up to £5,998 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?
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Fidelius are rated 4.7 out of 5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
What does it mean for interest rates and your mortgage?
The Bank of England raised the base rate 14 consecutive times since December 2021 to try to dampen inflation, and made its first base rate reduction for over four years in August 2024, taking the rate from 5.25% to 5%. This was followed by a further quarter-point cut in November 2024 and four more in February, May, August and December 2025, which means the base rate is currently at 3.75%.
Despite the fact that inflation rose again in the 12 months to August, most commentators don’t expect interest rates to change this month, although the future trajectory of rates depends on which way inflation moves next.
Swap rates, which determine fixed-rate mortgage pricing, have been volatile in recent weeks, with many lenders withdrawing and replacing deals after just a few days.
Ben Thompson, Director of Home Moving Strategy, Mortgage Advice Bureau, said: “Two rises in a row makes a hold more likely tomorrow, with a hike unlikely but not impossible. Lenders will already have been adjusting their pricing in anticipation, not waiting for the announcement itself. If you’re a first time buyer with an offer on the table, that’s a real reason to lock it in now rather than assume it’ll still be there next week.
“The situation is similar for anyone remortgaging, but the stakes are higher. If your deal ends in the next few months, don’t wait for tomorrow’s decision to act. Lenders are already pricing in today’s data, and the deals available right now might not still be there once the announcement lands.
“If you’re moving home, don’t put your plans on hold over this. Just make sure the numbers you’re working from account for some potential movement in rates between now and when you complete – not just where you stand today.”
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Want to speak to a mortgage adviser? Speaking to an experienced adviser 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 2,600 reviews.
Borrowers who locked into very low five-year fixed rates in 2021 are likely to face a particularly sharp jump in payments later this year when they come to remortgage, so should start planning for this as soon as possible.
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 facing a mortgage timebomb?
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.
Sarah Coles, head of personal finance at AJ Bell, said: “A rise in inflation is a mixed blessing for savers. For those who are prepared to put the legwork in, there are some great rates around right now. However, for anyone less hands-on, it raises the risk their spending power is being devoured by inflation.
“Inflation concerns have raised rate expectations slightly over the past few weeks, so we have seen fixed rate savings accounts get increasingly generous. They rarely shoot up overnight, because no bank wants to pay more than it has to, so the most competitive deals tend to nudge up over time. As a result, you can now make more than 5% on savings fixed for two, three and five years, and 4.93% on accounts fixed for a year. It means anyone who has been considering locking money away for a period has plenty of attractive options.
“The downside is that most money isn’t in competitive fixed rate accounts. Most of it is in easy-access savings, where an awful lot is languishing with the high street giants paying miserable rates of interest. For a saver with £20,000, the big six (HSBC, Barclays, Lloyds, NatWest, Santander and Nationwide) pay an average of 1.16% on the branch-based easy-access accounts with no withdrawal restrictions. This is all clearly losing value after inflation.”
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 mores 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)
Ms Haine said; “While rising bills will feel all too familiar for households still recovering from the darkest days of the cost-of-living crisis, building a healthy emergency fund is one of the best ways to strengthen financial resilience. As a rule of thumb, those of working age should aim for at least three months’ worth of essential expenses in cash, while for retirees it’s between one and three years’ worth.”
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