Inflation has ticked higher in October, rising from last month’s 1.7% to 2.3% – 0.3 percentage points above the target set by the Bank of England (BoE).
The increase was expected and generally attributed to last month’s 10% rise in the energy price cap.
However, Craig Rickman, personal finance and pensions expert at interactive investor, said a 0.6 percentage point increase is “sharp” and “a blow to borrowers, who are crying out for lower interest rates to ease mortgage repayments”.
The BoE is now more likely to hit the pause button and keep rates steady at its final meeting of the year next month.
GAM Investments chief multi-asset investment strategist Julian Howard said this situation was both “awkward and just to be expected”. He isn’t buying into governor Andrew Bailey’s narrative, who tried to smooth things over by talking about a gradual approach to monetary easing and allowing time to absorb this ‘one-off’ increase.
Howard identified several things getting in the way of linearly falling inflation, including the hike to employer national insurance unveiled in the recent Budget and sterling declining against the dollar in the aftermath of the decisive US election.
"The challenge for the BoE now will be to support the economy while at the same time controlling this never-quite-dead inflation. The BoE can’t just myopically chase down inflation to the exclusion of all else, since it also has a commitment to support government economic policy including its growth and employment objectives,” he said.
"In a sense, the BoE’s dilemma reflects a similar tension at the heart of the new government’s policy, namely supporting growth while trying to achieve a contradictory aim at the same time. For the government, this is improving public services. For the BoE, it is controlling inflation.”
The first repercussions of higher inflation and steady rates will be felt in the savings market. The majority of top rates have remained largely unchanged since the previous inflation announcement. However, short-term bonds and cash ISAs continue to be slashed, said Moneyfactscompare’s Caitlyn Eastell.
“As a result savers can no longer get any fixed returns paying above 5% across both ISAs and non-ISAs. The table-topping longer-term fixed rates are resilient, but there have been a few new brands taking market-leading positions over shorter-terms,” she said.
The top easy access account for new customers suffered the largest drop of 0.35 percentage points.
On the other hand, easy access ISAs stand to be the most improved since the previous inflation announcement. With a top rate paying 0.20 percentage points more, these are some of the last remaining accounts for new customers that pay above 5%, with the other being a non-ISA notice account.
Research conducted by the Bank of England revealed that £252bn are sitting in UK current or savings accounts earning no interest.
“This signals the glaring apathy savers have towards their nest eggs,” said Eastell.
“To avoid missing out on interest payments, there is a large selection of accounts for savers to choose from, which offer inflation-busting rates. Sensible savers would be wise to lock away their cash for guaranteed returns.”