Britain’s inflation levels have reached the highest for a decade, piling pressure on millions of households and businesses financially.
‘Rising energy costs, surges in fuel prices and increasing costs across the board, are contributing to a further squeeze on budgets, many of which are already at breaking point’, Joanna Elson CBE, chief executive of the Money Advice Trust, warned.
Here, This is Money unravels what has been announced today, what it could mean for future decisions about interest rates, and why this all matters to you, whether you are a saver, investor, mortgage-holder, prospective property buyer or business owner.
Rocketing: Britain’s inflation levels have reached the highest for a decade
What inflation figures were announced today?
Figures published by the Office for National Statistics this morning revealed that inflation surged by 4.2 per cent in the year to October, marking the highest rate for a decade.
In the year to September, inflation climbed by 3.1 per cent, and today’s latest annual figure of 4.2 per cent was higher than many City experts had expected.
There are quite a few forces combining to push up inflation, but the key drivers are higher energy and fuel prices, according to the ONS.
ONS chief economist Grant Fitzner, said: ‘This was driven by increased household energy bills due to the price cap hike, a rise in the cost of second-hand cars and fuel as well as higher prices in restaurants and hotels.
‘Costs of goods produced by factories and the price of raw materials have also risen substantially, and are now at their highest rates for at least 10 years.’
Impact: Higher energy and fuel costs have pushed up UK inflation levels
The latest data showed that the 12 per cent spike in the energy price cap on household bills on 1 October was among the factors contributing the most to the inflation upturn.
Under Ofgem’s latest price cap, energy bills for 15million households increased on 1 October by at least £139 to a record high of around £1,277 a year.
Petrol prices were responsible for their share of inflation pain too. This time last year some areas of the UK faced restrictions on movement and petrol prices were down at 113.2p per litre, but this October they hit 138.6p.
It means filling up a 50-litre car now costs £12.70 more than this time last year.
Bills for eating out and hotels also rose as pandemic-driven Government VAT support for hospitality and attractions was scaled back. The cost of second-hand cars is also on the up. Higher prices for clothes, transport and education also took their toll.
Supply issues are also leading to shortages of goods including building materials and computer chips, further pushing up prices.
Car hire has soared in price, rising by 30 per cent this year, shortly followed by air fares which have risen by 28 per cent.
Laura Suter, head of personal finance at AJ Bell, said: ‘The biggest price rise of all food items is fruit drink bottles, so things like Fruit Shoots, which are a staple in many parents’ weekly shop.
‘A pack of them has risen 32 per cent this year. The other biggest risers are a pack of yogurts, which is up 19 per cent, and low-fat spread, which has risen 18 per cent.
‘It’s going to cost more to make a spaghetti bolognaise now, as tinned tomatoes have risen in price by 17 per cent.’
How did the Government respond?
On the back of today’s inflation news, Chancellor Rishi Sunak said: ‘Many countries are experiencing higher inflation as we recover from Covid, and we know people are facing pressures with the cost of living, which is why we are taking action worth more than £4.2billion to help them.
‘We’re helping people get into work, progress and keep more of what they earn, through our Plan for Jobs and by effectively cutting taxes for workers receiving Universal Credit.
‘We are also providing more immediate support, including through the £500million Household Support Fund for the most vulnerable families, fuel and alcohol duty freezes, and the energy price cap.’
How did markets respond?
The pound received another modest lift this morning following the publication of today’s inflation figures from the ONS.
Sterling is currently at $1.34 against the US dollar and €1.19 against the euro.
In early afternoon trading, the FTSE 100 was down 0.26 per cent or 18.87 points to 7,308.10.
How does rising inflation affect me?
Rising inflation has an impact on every household up and down the country, but some will feel its impact more than others.
Inflation affects everything from the cost of transport, hotels and electricity to food prices when eating out at a restaurant or snapping up groceries in a supermarket.
Impact: Higher inflation means your money does not stretch as far as it used to
It can also affect decisions on interest rates, which can in turn affect things like rates on personal savings accounts.
Surging inflation measures means it has become more expensive to maintain our previous lifestyle.
In essence, if your income has not risen over the measured period by at least the rate of inflation, then your buying power will have dropped. Your money will not stretch as far as it did before.
How long will inflation continue to rise?
The Bank of England expects inflation to reach 5 per cent by next spring.
After this point, according to the BoE, upward pressures will start ebbing away, enabling inflation to start falling back towards the 2 per cent target.
‘That’s the optimistic scenario’, Tom Stevenson, investment director for personal investing at Fidelity International, said.
He added: ‘ If so, it would tie in with some previous inflationary periods like the one before the financial crisis between the turn of the millennium and 2008.
Expectations: The Bank of England, led by Andrew Bailey, expects inflation to reach 5% by next spring
‘The alternative scenario, the one that worries policy-makers and investors alike, is the 1970s where prices hit 6 per cent in the late 1960s, fell back under 3 per cent in the early 70s but then took off in two massive price spikes in 1974 and again in 1979.’
The EY Item Club has its own predictions for inflation.
Martin Beck, senior economic advisor to the EY Item Club, said: ‘The EY Item Club expects inflation to drift up further over the remainder of this year, as the impact of higher oil prices and supply chain challenges continue to feed through.
‘The CPI measure is then likely to briefly peak next spring, when the impact of the next rise in the energy price cap and the VAT rate for the hospitality sector being restored to 20 per cent go on to affect the index.
‘But each of these factors are temporary in nature and there remains little evidence of any escalation in underlying inflationary pressures.
‘With oil and natural gas prices unlikely to continue rising at recent heated rates, and large negative base effects coming into play, the EY Item Club expects CPI inflation to fall below the 2 per cent target by mid-2023.’
How does inflation affect decisions on interest rates?
Rising inflation means the Bank of England’s policymakers led by Andrew Bailey are under more pressure to act on low interest rates.
While the reality can sometimes be different, in theory, inflation and interest rates are in an ‘inverse’ relationship.
This means that when rates are low, inflation tends to rise, and when rates are high, inflation tends to fall.
When will interest rates go up? How much by?
The BoE’s Andrew Bailey has said the level of inflation makes him ‘very uneasy’.
This has led some commentators to suggest that the central bank will raise its base interest rate from the current 0.1 per cent level at the next meeting of the Monetary Policy Committee in December.
At it’s last meeting on 4 November, the Monetary Policy Committee voted 7:2 to keep the base rate at 0.1 per cent and 6:3 to leave its quantitative easing programme unchanged.
While it is impossible to know for certain what will happen, markets are pricing in a rate rise from 0.1 to 0.25 per cent at the end of this year, with a second rise to 0.5 per cent in spring 2022, hitting 1 per cent by the end of 2022.
How will rising interest rates affect me as a saver?
Higher inflation means cash savings are being eroded amid dismally low interest rates.
Becky O’Connor, head of pensions and savings at Interactive Investor, said: ‘For savers, higher inflation erodes savings to the point where it becomes hard to justify keeping anything but the minimum in an emergency savings account if you don’t want to lose the value of your savings in real terms.
‘Inflation is now more than 4x higher than the interest rates paid on easy-access savings accounts.’
She added: ‘Anyone looking to put money away safely will have to effectively give up the prospect of real returns until inflation is under control and interest rates are off the floor.’
How will rising interest rates affect me as a mortgage-holder?
When interest rates go up, which it looks like they will do in the not too distant future, rates on mortgages will also go up.
Some lenders like HSBC have already hiked rates on their mortgage deals. Anyone without a fixed-rate mortgage deals risks being hit hardest when interest rates rise.
Speaking to This is Money, Tomer Aboody, director of property lender MT Finance, said: ‘With the global pandemic causing the worst economic situation we have faced in over a hundred years, any interest rate rise in the short term will have to be minimal in order to manage any potential fallout for mortgage borrowers on non-fixed rates.
Lender impact: When interest rates go up, which it looks like they will do in the not too distant future, rates on mortgages will also go up
‘The spike in inflation is already being felt with consumers seeing price increases across the board, including energy and fuel prices, and something needs to be done about that.
‘The long-term outlook will be different with interest rates needing to rise in order to encourage savers to save, and change the spending habits which have developed in recent times.
‘While inflation is expected to rise further before it starts to fall, it is still unlikely that mortgage rates will rise as much as homeowners experienced 20 years ago, since our starting point for both interest rates and inflation is very low.’
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: ‘Mortgage pricing continues to be a mixed bag, with pricing rising for those requiring 60 to 75 per cent loan-to-values, while higher LTV borrowing costs continue to fall.
‘The good news is that lenders continue to broaden policy with many now back at pre-Covid criteria, making it easier for a wider range of people to get a mortgage.’
What is happening to house prices?
The average house price has hit a record high of £270,000 after surging by £28,000 over the past year, official figures published today revealed.
Across the UK, property values increased by 11.8 per cent in the year to September, accelerating from 10.2 per cent annual growth in August, the ONS said.
The average house price in Wales increased by 15.4 per cent over the year to September, hitting a record £196,000.
Going up: Across the UK, property values increased by 11.8% in the year to September
In England, the average house price increased by 11.5 per cent over the year to September, also pushing the average property value there to a record high of £288,000.
The average house price in Scotland increased by 12.3 per cent over the year to September to reach £180,000.
In Northern Ireland, the typical property value increased by 10.7 per cent annually, reaching £159,000.
Some experts think prospective buyers should move fast to secure a deal while interest rates remain at rock-bottom.
What is happening to UK employment levels?
On Tuesday, official figures revealed that the number of workers on UK company payrolls rose sharply last month despite the end of the Government’s furlough scheme, after a record increase in people moving from unemployment into work ahead of its closure.
The ONS said Britain’s employers added 160,000 more workers to their payrolls in October, taking the total to 29.3million in the first month after the removal of the multibillion-pound wage subsidy scheme.
The headline unemployment rate fell by more than expected, slipping to 4.3 per cent in the three months to the end of September, from 4.5 per cent in August. But, it still remains above the pre-pandemic level of 4 per cent.
What can I do if I’m struggling financially?
With inflation on the up, many face a tough winter and new year financially.
For anyone in debt, Caroline Siarkiewicz, chief executive at the Money and Pensions Service, said: ‘There are lots of different debt solutions and so getting free impartial debt advice will get people to the right solution for them.
‘Debt packager firms have the potential to refer people to a debt solution that may not be suitable for their circumstances. It’s really important that people know that help is available and where they can find it.
‘Anyone who is worried about keeping on top of bills and payments should visit the Debt Advice Locator Tool on our MoneyHelper website to find free high quality debt advice to help get back their finances back on track.’
Joanna Elson CBE, chief executive of the Money Advice Trust, said: ‘At National Debtline nearly four in ten callers do not have enough coming in to cover essential outgoings. As the cost of living continues to increase, our concern is that more people will be pushed into difficulty.’
How to find the best savings rates
Savings rates have been in the doldrums for many years but the situation was hugely exacerbated by the pandemic and the emergency base rate cut to 0.1 per cent.
But there are ways to ensure your cash is at least in the best of the bunch at all times.
Checking top rates is essential, but it is also possible to make life easier overall and manage your savings pots in one place.
Over the past few years a number of savings platforms have launched, offering savers the option to switch as and when better deals become available and manage accounts from different banks and building societies.
They each work slightly differently and include their own exclusives. To check out what’s on offer take a look yourself:
> Hargreaves Lansdown Active Savings
Or you can view This is Money’s comprehensive best buy savings tables here, independently curated by savings guru Sylvia Morris:
> Compare best savings rates now