Inflation rose to 2.6 per cent in the year to November, according to figures released by the Office for National Statistics (ONS) on Wednesday.
The Consumer Prices Index (CPI) measure of inflation is above the Bank of England’s two per cent target and marks an increase from 2.3 per cent in the year to October.
Though inflation has risen it is still much lower than the previous peak of 11.1 per cent in October 2022.
Economists had widely expected an increase to the figure, with economists predicting it would climb to 2.6 per cent or 2.7 per cent.
Inflation is widely expected to increase over the next year.
In October, the Office for Budget Responsibility (OBR), said that the October Budget would increase inflation, partly because some of the rise in employer national insurance contributions would be passed onto consumers in the form of higher prices.
Experts expect inflation to increase in early 2025.
Deutsche Bank Research said in a note last week: “Higher energy prices will lift CPI to begin the year.”
Pantheon Macroeconomics has said CPI inflation will pick up to 3 per in April “as favourable energy price effects fade and services inflation stays elevated.”
What does it mean for interest rates?
Higher inflation means prices are rising quicker than otherwise, and this can prompt the Bank of England to keep interest rates higher for longer.
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Read MoreInterest rates are currently at 4.75 per cent after being cut in November
Economists do not currently expect another cut when the Bank’s Monetary Policy Committee (MPC) meet on 19 December.
Next year, most forecasters expect multiple cuts to interest rates.
Capital Economics has said it forecasts that rates will continue to be cut gradually, and that they will fall to 3.5 per cent in early 2026.
Pantheon Macroeconomics expects interest rate cuts in February, May and November, taking rates to 4 per cent by the end of 2025.
What does this mean for mortgages, savings and pensions?
Mortgages are not directly affected by inflation, although many products are affected by the Bank of England’s base rate, which inflation influences.
Tracker products and standard variable mortgages change directly when interest rates change.
If interest rates rise as a result of increased inflation, mortgage holders on such deals will see their rates increase.
Fixed mortgages tend to work on long-term predictions for where the base rate will go. This means that a big drop in inflation can send mortgage rates down, because it can lead experts to believe the base rate will fall sooner rather than later.
Rates have been falling in recent weeks, and experts expect them to fall further next year. The inflation figure today is unlikely to have a major impact on mortgage rates.
Savings
High inflation is bad news for savers as it erodes the value of money held in the bank. Therefore, the lower the rate, the better the news for savers.
The effects of inflation on the Bank of England’s interest rate also impacts savers, because of the base rate’s influence on savings rates.
Experts believe we are “past the peak” for savings, with most fixed rates now dropping below 5 per cent. This means it is worth taking advantage of the best deals now.
Currently, the best easy-access account is 4.85 per cent with Atom Bank – above inflation. The best one-year fixed is with Habib Bank Zurich at 4.8 per cent.
Pensions
Recent drops in inflation will have been welcomed by pensioners who have been struggling with the cost of living crisis over the past two years, especially those for whom the state pension makes up a large portion of their income.
Higher inflation can eat into pensioners’ savings.
Another factor to be aware of is the impact of inflation on annuity rates.
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.
While they have been unpopular in recent years, rising interest rates have improved the annual incomes someone can buy.
But for retirees opting for one, time may be of the essence. With the Bank having cut interest rates, rates may start to fall.
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