The latest inflation figures show that prices of goods and services in the UK are rising at the fastest rate in a decade.
Office for National Statistics data reveals that the Consumer Price Index measure of inflation rose to 4.2% in October, up from 3.1% in September. It’s the highest inflation has been since November 2011.
The figure was higher than predicted, with a dramatic jump in household energy prices responsible for much of the increase.
Furthermore, the situation could be set to get worse, with the Bank of England warning that inflation will peak at close to 5% next year before gradually fading back towards its 2% target as disruption caused by the pandemic recedes.
Becky O’Connor, head of pensions and savings at Interactive Investor, said: “For pensioners and others on limited incomes, this level of inflation is hard to cope with.
“Careful budgeting only gets you so far. Those already on the cheapest possible deals, the lowest tariffs and buying the cheapest food have very little wriggle room. You will always be spending something on food, energy, and fuel if you drive, and these are among the categories where prices are rising the fastest.”
Rising inflation is a particular issue if you hold a significant amount in cash savings. With interest rates at record lows, rising inflation means the value of your money is falling in real terms.
Becky from Interactive Investor adds: “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 four times higher than the interest rates paid on easy access savings accounts.”
Interest rates likely to rise to combat inflation
One consequence of the rise in the cost of living is that interest rates are likely to increase in the next few months.
While the Bank of England unexpectedly held the base rate at 0.1% in November, most experts predict it will rise soon. This will be positive news for savers as interest rates will likely rise, but returns are still likely to lag behind inflation.
Becky from Interactive Investor concludes: “For people willing to consider putting their money to work for longer and who are happy with a degree of risk, the stock market can offer a better chance of longer-term growth that could beat inflation.”