UK inflation stuck at 3.8%: What it means for interest rates, mortgages and pensions

Officially it may be stuck at 3.8 per cent, but for millions of people inflation will feel like it’s running much higher as prices continue to soar in the supermarket and utility bills head north.

New figures from the Office for National Statistics (ONS) show that the annual rate of consumer prices index (CPI) inflation was 3.8 per cent in September, remaining at the same level as both July and August. Upward pressure from petrol prices was offset by easing food costs, according to the ONS.

The news provides a glimmer of hope for the Chancellor ahead of next month’s autumn Budget and will also provide some relief for the Bank of England, though CPI is still running at almost twice the central bank’s 2 per cent target. Economists had been expecting a headline reading of 4 per cent for September.

Inflation may be stuck at a headline rate of 3.8% but shoppers will have seen steeper rises on many everyday products.

ONS chief economist Grant Fitzner said: “The largest upward drivers came from petrol prices and airfares, where the fall in prices eased in comparison to last year. These were offset by lower prices for a range of recreational and cultural purchases including live events.

“The cost of food and non-alcoholic drinks also fell for the first time since May last year.”

Food and non-alcoholic drink prices helped contribute to the steady inflation reading, after they dipped 0.2 per cent month-on-month, slipping for the first time since May last year. The ONS indicated that this was likely to have been driven by increased sales and discounting by retailers.

Nevertheless, food and drink prices are still 4.5 per cent higher than the same month last year after a recent acceleration in costs, which many suppliers have linked to higher labour costs and national insurance contributions. While some food prices have remained stable and some have actually eased in recent months, shoppers will have noticed above-inflation hikes on many products such as orange juice and chocolate.

There is speculation that the Bank of England, above, may still announce a further cut in interest rates before the year is out.

Kevin Brown, savings expert at Scottish Friendly, the Glasgow-based mutual, said: “On paper a flat inflation reading is to be welcomed. But in the real world, many families are still struggling to make ends meet after three years of blistering price increases.

“As a double blow, September’s inflation reading will probably not be enough to persuade the monetary policy committee (MPC) to reduce borrowing costs again this year. Policymakers will want to see clear evidence that inflation is heading back towards their 2 per cent target before acting, which means another rate cut this year remains unlikely.”

However, the weaker-than-expected CPI rate will provide some relief for the Bank of England in its bid to bring inflation back down to its target rate. The bank had previously predicted that UK inflation would peak around September before steadily falling back down.

Some analysts are still counting on a further cut in interest rates before the end of year with the MPC set to hold two more meetings, on November 6 and December 18, just ahead of Christmas.

Luke Bartholomew, deputy chief economist at Scottish funds heavyweight Aberdeen, said: “Inflation was widely expected to pick up in this report so the fact that it hasn’t is a positive surprise for the Bank of England and markets.

“There might be some technical factors around airline prices that are helping this report, but more fundamentally last week’s labour market report also showed that wage growth is moderating.

“A rate cut in November may still prove to be too soon, but the prospect of a December rate cut has increased and we still expect significant easing over the next year.”

Matthew Ryan, head of market strategy at global financial services firm Ebury, said the MPC was “stuck between a rock and a hard place” as it weighs up a wealth of, at times conflicting, economic data.

“We are not holding our breath for a November cut, which we see as essentially off the table,” he added. “Markets now view a December cut as more likely than not, but we are still not entirely convinced just yet, and believe that elevated inflation could thwart any further easing until at least February.”

Mortgages

Financial experts have said that while inflation unexpectedly holding at 3.8 per cent may take a small amount of pressure off mortgage rates in the short term, the upcoming Budget will likely see lenders err on the side of caution.

Eamonn Prendergast, chartered financial adviser at Palantir Financial Planning, said: “Flat inflation offers hope but not a home run for mortgage holders. We might see marginal downward movements in swap rates and cautious tweaks to fixed-rate deals, but real relief will depend on the next data prints and the tone of the Budget. For now, stability is the win - not celebration.”

Helen Morrissey, head of retirement analysis at investment platform Hargreaves Lansdown, said: “With inflation remaining unchanged in September at 3.8 per cent, it means that average wage data is putting pensioners in line for a 4.8 per cent increase from April.

“This means someone on a full new state pension would see their weekly payment rise to £241.30 per week. Someone on the full basic state pension would see their weekly payment boosted to £184.90 per week.

“However, people on the basic state pension will not receive the full triple lock increase on their entire pension payment. These increases are not yet set in stone - we will need to wait for the Budget for confirmation,” she cautioned.

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