The Consumer Prices Index (CPI) measure of inflation is now at the highest level it has been for over a year. The figure was 4 per cent last January and 3.4 per cent the following month. It was 3.2 per cent last March.
Economists had widely predicted that inflation would rise – partly due to an increase in energy prices last month.
Food and non-alcoholic beverages inflation stood at 3.4 per cent, up from 3 per cent in March’s reading.
Some, such as Pantheon Macroeconomics, suggest the figure could hit 3.7 per cent by September, but will stay above 3 per cent until next Spring.
In a report this month, the Bank of England said previous increases in energy prices are still likely to drive up CPI inflation from April onwards, to 3.5 per cent in the third quarter of the year.
What does it mean for interest rates?
Interest rates are currently at 4.5 per cent after being cut in February, held in March and cut again in May.
But that is not guaranteed. On Tuesday, the Bank’s chief economist Huw Pill said the Bank had been cutting rates too quickly.
Mortgages
Tracker products and standard variable mortgages change directly when interest rates change.
Mortgage rates are broadly expected to fall throughout the year, though there has been a small uptick in recent days.
The effects of inflation on the Bank’s interest rate also affects savers, because of the base rate’s influence on savings rates.
For example, Chip offers an easy-access cash ISA worth 4.85 per cent – well above inflation – though this includes a temporary bonus rate.
Pensions
Higher inflation can eat into pensioners’ savings.
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But in real terms, it would be worth exactly the same as it is today, because inflation has eaten away at the potential growth.
Annuities offer a guaranteed annual income in retirement. They offer an alternative to drawing down money from a pension pot, which could eventually run out, particularly if a retiree lives longer than expected.
But for retirees opting for one, time may be of the essence. With the Bank expected to cut interest rates further, rates may fall.
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