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Inflation rose to 2.3 per cent in the year to October, according to figures released by the Office for National Statistics (ONS) on Wednesday.
The Consumer Price Index (CPI) for inflation is above the Bank of England’s two percent target, marking a rise of 1.7 percent in the year to September.
It is the highest jump in more than two years, although it is still much lower than the previous peak of 11.1 percent in October 2022.
Services inflation, including catering costs and airline tickets, is 5 percent, versus the expected 4.9 percent. Core inflation, which excludes more volatile items such as food, alcohol and tobacco, also rose to 3.3 percent, up from 3.2 percent in September.
Economists had widely expected the numbers to rise as the economy rose Ofgem’s energy price cap in October.
This meant that the price most households pay for gas and electricity rose by an average of 10 percent since the beginning of last month, pushing up the inflation rate.
This increase was somewhat offset by falls in live music and theater ticket prices, according to the ONS.
Darren Jones, the Chancellor of the Exchequer, said: ‘We know that families across Britain are still struggling with the cost of living. That’s why last month’s Budget focused on rebuilding the foundations of our economy so we can deliver change. That includes raising the national minimum wage, freezing fuel taxes and protecting working people’s paychecks from higher taxes.
“But we know there is more to do. That’s why the government is focused on economic growth and investment so we can make every part of the country better off.”
Here’s what it means for you and your money.
What does this mean for future inflation?
Inflation is widely expected to rise in the coming year.
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Last month the Office for Budget Responsibility (OBR), which acts as a watchdog for the Treasury, said the October budget would increase inflation, partly because some of the increase in employer contributions would be passed on to consumers in the form of higher prices.
For now, the budget is expected to increase inflation by just under 0.5 percentage points at its peak, according to the Bank of England.
It added that it does not expect inflation to return below the two percent target before spring 2027.
The increase in energy prices has also contributed to this. Electricity prices rose 7.7 percent in October compared to the previous month, after falling 7.5 percent in the same period last year.
Gas prices rose by 11.7 percent, compared to a decline of 7 percent the year before.
What does it mean for interest rates?
Higher inflation means prices are rising faster than otherwise, and this could prompt the Bank of England to raise interest rates, or at least keep them high for longer.
Interest rates currently stand at 4.75 percent after being cut earlier this month, but economists currently do not expect another cut in the base rate when the Bank’s Monetary Policy Committee (MPC) meets in December.
Ruth Gregory, deputy chief UK economist at Capital Economics, said: “The surprisingly large recovery in inflation in October will not stop the Bank from cutting rates further. But it does go some way to supporting our view that the Bank will skip the December meeting and cut rates only gradually, by 25 basis points in February and at each other policy meeting, until rates reach 3.5 percent in early 2026.”
If interest rates fall more slowly than expected, it could mean that households will have to deal with higher mortgage rates for longer, as lenders tend to base their prices for fixed mortgages on predictions about where interest rates will go in the future.
Since the Budget, many lenders have increased their rates.
What does this mean for mortgages, savings and pensions?
Mortgages
Mortgages are not instant affected by inflation, although many products are affected by the Bank of England’s base rate, which is affected by inflation.
Tracker products and standard variable mortgages change immediately when interest rates change.
If interest rates rise due to increased inflation, mortgage holders of such deals will see their interest rates rise.
Fixed mortgages typically work based on long-term predictions of where the base rate will go. This means that a large drop in inflation could cause mortgage rates to fall, as it could lead experts to believe that the base rate will fall sooner rather than later.
However, despite an earlier drop in inflation in September, providers have increased their rates following an increase in the swap rate, which determines the price of fixed mortgages.
As a result, households coming to the end of their mortgage agreement could consider taking out a new deal now, experts warn.
Savings
High inflation is bad news for savers because it erodes the value of the money in the bank. The lower the interest rate, the better the news for savers.
The effects of inflation on Bank of England interest rates also affect savers, due to the influence of the base rate about the savings interest.
Experts believe we are “past the peak.” savingswith most fixed rates now falling below 5 percent. This means it’s worth taking advantage of the best deals now.
Currently, the best easy-access account is 4.85 percent at Atom Bank – above inflation. The best fixed interest rate for one year is that of SmartSave at 4.76 percent.
Pensions
The recent falls in inflation will have been welcomed by pensioners who have suffered the cost of living crisis over the past two years, especially those for whom the state pension makes up a large part of their income.
However, they are now faced with rising inflation again. Dean Butler, managing director of retail direct at Standard Life, said: “The Chancellor confirmed at the Budget that the state pension will rise by 4.1 per cent from April, or £473 a year, but as inflation rises above the Bank of England exceeds the percentage target, retirees will experience less of a boost in real terms.
“If inflation remains at around 2.3 percent, the real boost for pensioners will be 1.8 percent – if inflation remains at target, they would be 2.1 percent better off. Persistent inflation is also likely to delay further rate cuts, which could hit retirees with debt or housing costs, while potentially helping those with savings.”
Another factor to consider is the impact of inflation on annuity rates.
Annuities provide a guaranteed annual income upon retirement. They provide an alternative to withdrawing money from a pension pot, which can eventually run out, especially if a retiree lives longer than expected.
Although they have been unpopular in recent years, rising interest rates have improved the annual income a person can buy.
But for retirees who choose to do so, time can be of the essence. Now that the Bank has recently cut interest rates because inflation is almost 2 percent, interest rates may start to fall.