The Consumer Prices Index (CPI) measure of inflation released today is well above the Bank’s 2 per cent target.
It comes the same week as the Bank of England are expected to hold interest rates at 4 per cent.
Core CPI – which excludes energy, food, alcohol and tobacco – came in at 3.6 per cent, down from 3.8 per cent the previous month.
Inflation is widely expected to stay high this year, but economists are divided on how high it will reach.
It is expected to stay above the 2 per cent target level for another two years, until 2027.
What does higher inflation mean for interest rates?
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Interest rates are currently at 4 per cent after being cut in early August.
Many believe the next cut will come next year, though the Bank’s next decision is this Thursday (18 September).
What does this mean for mortgages, savings and pensions?
Mortgages are not directly affected by inflation, although many products are affected by the Bank’s base rate, which inflation influences.
Fixed mortgages tend to follow swap rates, which work on long-term predictions for where the base rate will go.
Savings
The effects of inflation on the Bank’s interest rate also affects savers, because of the base rate’s influence on savings rates. Savings rates have dropped in recent months, though it is possible to bag a deal that beats inflation.
Trading 212 offers a cash ISA account paying 4.38 per cent, though this also includes a temporary bonus.
Higher inflation can eat into pensioners’ savings.
But in real terms, it would be worth exactly the same as it is today, because inflation has eaten away at the potential growth.
Annuities offer a guaranteed annual income in retirement. They offer an alternative to drawing down money from a pension pot, which could eventually run out, particularly if a retiree lives longer than expected.
When interest rates fall, this reduces the annual incomes someone can buy.
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