- CPI jumped from 2.9% to 3.1% in the year to August
- Fuel costs were primarily responsible for the hike as petrol prices hit highs not seen since November 2022
- Core and services CPI remained unchanged at 2.6% and 3.4% respectively
- Bank of England still expected to hold rates at tomorrow’s MPC meeting
- What rising inflation means for your savings
Danni Hewson, AJ Bell head of financial analysis, comments on the latest UK inflation data:
“Motorists will be hyper aware that prices have been rising at a budget-squeezing rate over the past few weeks. Petrol costs hit highs in August not seen since November 2022 after the ceasefire between Iran and the US collapsed and fears over oil supplies hit the headlines once again.
“People are already trying to cut back on the number of trips they make. The latest data on grocery sales from Worldpanel by Numerator showed 18 million fewer visits to supermarkets in the last tracked period. Holidaymakers were also impacted by rising airfares, with many families putting off booking until the last minute because of concerns earlier in the year about potential flight cancellations.
“But after our last uncomfortable brush with higher living costs, we know all too well that rising fuel prices are only the beginning of the story. Costs for goods have been slowly creeping up, and digging into the latest producer prices data it’s clear that what’s on the sticker today is likely to be higher in the months to come.
“Oil isn’t just a factor in transportation costs, it’s also an integral part in plastics and packaging. As AI becomes increasingly important for UK growth, the jump in metal prices is expected to continue to feed through to the price of key components such as AI chips which are in high demand.
“So far food prices have remained fairly subdued, with food inflation holding steady at 1.3%. The price of goods like chocolate and sugar are not rising as fast as they were at the same time last year, although there are warnings that a poor harvest in the UK following this summer’s scorching heat and the potential impact of El Niño are likely to see cost pressures mount in the coming months.
“For the Bank of England, there are a few factors expected to play into tomorrow’s interest rate decision. Core inflation has held firm, as has service sector inflation, with a loose labour market creating pay restraint.
“Workers looking at rising prices are less likely to demand big pay hikes in the current climate because they’re nervous about the jobs market. Add in consumer caution and businesses worried about their spending and the upcoming UK Budget, and MPC members will need to walk a fine line or risk pushing the economy backwards.”
What rising inflation means for your savings
Sarah Coles, head of personal finance at AJ Bell, comments:
“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.
“The more competitive end of the easy-access market includes several accounts with bonuses for a fixed period, or deals which last for a year and then shift you to a different account paying less interest. Even when there’s no time limit on an account, the longer you have held it, the more likely it is that they have cut the interest you’re making. It means that even if you tracked down the best possible deal a year ago, it could be decidedly less rewarding now. So it’s worth hunting down a competitive account and considering cash hubs and online banks which tend to offer better deals.”
