UK inflation rate returns to 40-year high in fresh blow for savers

The UK’s inflation rate has returned to a 40-year high after a slight drop last month, latest figures from the Office for National Statistics (ONS) show. Prior to today’s rate hike, the Consumer Prices Index (CPI) rate was at 9.9 percent which was a slight drop from the month prior

However, volatile market reactions to the Prime Minister Liz Truss’ infamous ‘mini-Budget’ and the subsequent reversal appear to have added further pressure to the economy. To mitigate the rise in inflation, the Bank of England’s Monetary Policy Committee (MPC) raised the nation’s base rate to 2.25 percent earlier this month.

Despite this intervention, it has not stopped CPI inflation from returning to its 40-year high of 10. 1 percent. On why this has happened, the ONS stated: “The largest contribution to the annual rate in September 2022 is from housing and household services. The second largest contribution came from food and non-alcoholic beverages, which has overtaken that from transport.”

On today’s inflation figures, the Chancellor Jeremy Hunt said: “I understand that families across the country are struggling with rising prices and higher energy bills. This Government will prioritise help for the most vulnerable while delivering wider economic stability and driving long-term growth that will help everyone.

“We have acted decisively to protect households and businesses from significant rises in their energy bills this winter, with the government’s energy price guarantee holding down peak inflation.”

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While the Bank of England’s action has curbed the impact of inflation and boosted savings rates, mortgage holders and those in debt have seen their payments go up.

Concerns have been raised about whether the Government will keep its triple lock promise for state pensioners and raise benefit payments in line with inflation.

The new Chancellor Jeremy Hunt confirmed the majority of the Government’s fiscal policies, including the reduction to income tax and the two-year price guarantee, were to be scrapped.

James Smith, ING’s Developed Markets economist, believes these constant U-turns could prove to be inflationary down the line.

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Mr Smith said: “For the time being though, the moves by the Chancellor will reduce the need for the Bank of England to act as aggressively. Having pencilled in a 100 basis-point rate hike in November, we now think that’s more likely to be 75bp.

“Markets are still expecting Bank Rate to peak at 5.2 percent next summer, albeit this pricing has been pared back since the fiscal U-turns.

“This leaves the Bank with a difficult decision: meet those expectations and bake in what are now very uncomfortable mortgage and corporate borrowing rates. Undershoot investor expectations, and the pound could fall materially.

“But in practice a weaker pound – and the extra imported inflation that might bring – is probably more desirable than the current strains that are starting to emerge as a result of ultra-high borrowing costs.”

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In this month’s ONS figures, food and drink price inflation has reached its highest level since April 1980. For September, food and non-alcoholic beverage prices increased by 14.6 percent over the last year, which is a rise of 13.1 percent in August.

This means that the food inflation rate has continuously gone up for the last 14 months, which will hurt Britons particularly during their weekly shop. Notably, the price of bread and cereals, meat products, milk cheese and eggs attributed to the rate hike.

On what this means for savers, abrdn’s financial planning expert Colin Dyer said: “Inflation resumed its upward climb in September, putting even more pressure on consumers’ already stretched pockets.

“And with the British Chambers of Commerce expecting inflation to spike at 14 percent over the next quarter – far above the government’s two percent target – it’s time for savers to take matters into their own hands if they want to see growth with their finances.

“It’s more important than ever for people to plan ahead and consider ways to mitigate the impact of inflation on their hard-earned savings. This will be particularly key for those relying on cash savings, like retirees, as they will be seeing those savings lose real term value as inflation increases.”

Alice Haine, a personal finance analyst at Bestinvest, added: “With the cost-of-living and cost-of-borrowing crises dominating the headlines, the message is now clear – this is not the time to be frittering away cash.

“Instead, one of the best ways to emerge from this period of financial instability intact is to hold onto your pennies and save and invest what you can to secure the best return possible.

“Consumers may now be able to find easy-access accounts with rates above the 2.5 percent mark and fixed-interest rates of over five percent – the highest level in more than a decade thanks to the Bank of England’s spate of interest rate rises – however, these are still no match for inflation of 10.1 percent.

“But as we should all have an emergency fund of at least six to 12 months’ worth of expenses stashed in an easy-access account – to pay for unexpected expenses or to protect against job loss or ill health – shopping around for the highest rate you can find will still pay off.”