Inflation stayed at 3.8 per cent in the year to August, according to figures released by the Office for National Statistics (ONS) on Wednesday.
The Consumer Prices Index (CPI) measure of inflation released today is well above the Bank’s 2 per cent target.
Economists had widely predicted that inflation would stay high.
It comes the same week as the Bank of England are expected to hold interest rates at 4 per cent.
Air fares made the largest downward contribution to the monthly change, while restaurants, hotel and motor fuel costs made large upward contributions.
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.
The CPI services annual rate slowed from 5 per cent to 4.7 per cent.
Inflation is widely expected to stay high this year, but economists are divided on how high it will reach.
The Bank of England has said it expected inflation to hit a peak of 4 per cent in September. However others, such as economist Andrew Sentance, believe it could go higher than 4 per cent, potentially to 5 per cent.
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?
Higher inflation means prices are rising quicker than otherwise, and this can prompt the Bank to keep interest rates raised for longer.
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Interest rates are currently at 4 per cent after being cut in early August.
Even though inflation is still well above the Bank’s 2 per cent target, there is a chance interest rates could be cut again later this year, although this hangs in the balance.
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
Mortgages are not directly affected by inflation, although many products are affected by the Bank’s base rate, which inflation influences.
Tracker products and standard variable mortgages change directly when interest rates change.
Fixed mortgages tend to follow swap rates, which work on long-term predictions for where the base rate will go.
Mortgage rates are broadly expected to fall modestly this year, though if inflation continues to rise and we don’t get any interest rate cuts, that could become less likely.
Savings
High inflation is bad news for savers as it erodes the value of money held in the bank. Therefore, the lower the rate, the better the news for savers.
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.
For example, Chase offers an easy-access account worth 4.75 per cent for current account holders – well above inflation – though this includes a temporary bonus rate.
Trading 212 offers a cash ISA account paying 4.38 per cent, though this also includes a temporary bonus.
Pensions
Higher inflation can eat into pensioners’ savings.
For example, if you are 67 and plan to retire in a year, assuming you have a pot of £87,500 in today’s money – roughly the average an over-50 will have by retirement, according to Pension Bee – then one year later, if inflation runs at 3 per cent, and your investment growth is 3 per cent, your pot would be worth £90,125.
But in real terms, it would be worth exactly the same as it is today, because inflation has eaten away at the potential growth.
Another factor to be aware of is the impact of inflation on annuity rates.
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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