Inflation rises to 4.2%

Inflation increased to 4.2% during October, which is its highest rate in almost a decade, adding pressure on the Bank of England to increase base rate to help control the rising cost of living.

Although many were expecting inflation to rise, today’s consumer price index (CPI), which measures inflation, was slightly above what many financial experts were expecting. The rate is also significantly above the Bank of England’s target inflation rate of 2.0%.

Rising energy prices and fuel costs, along with the cost of everyday items such as household goods, have contributed to the surge in inflation.

Danni Hewson, financial analyst at AJ Bell, said: “Just about everything is getting more expensive, though at least when it comes to the cost of goods and services in bars and restaurants we can point to a specific event as VAT jumped up from 5% to 12.5%. But many other pressures forcing prices up seem rather less than transitory. The cost of goods leaving the factory gate have surged to a ten-year high and supply bottlenecks, labour shortages and rising commodity prices don’t look like fizzling out in a hurry.

“Now more than double the Bank of England’s inflation target, this number is only expected to rise. The Bank itself expects 5% by spring next year, an expectation which will send a chill through many households already feeling the painful squeeze and realising that squeeze isn’t going to be short-lived. The Bank’s governor Andrew Bailey has admitted he’s worried by the figures and had given serious thought to hiking rates earlier this month.”

With no savings accounts able to match or beat the current rate of inflation, savers will likely see the value of their savings erode in real terms. However, it is not all bad news for savers.

The past few months have seen average saving rates slowly start to rise, mainly due to competition among challenger banks. As well as this, if the Bank of England increases base rate it could result in interest rates on saving accounts rising further.

Saying this, the next 12 months looks likely to be a challenging time for savers, especially those looking for an account that will be able to match the rising rate of inflation.

Long-term savers willing to take a riskier option may want to consider investing as an alternative. Although investing has the risk of the investor not making any returns on their investment, and in some cases may result in them losing all their money including initial deposit, they may offer above-inflation rate returns.

Due to the risks involved with investing those considering this option should carry out comprehensive research before making investments and may want to speak to an independent financial adviser to discuss their options. More information about investing can be found on our how to invest pages.

Savers wanting the security of a savings account may have to forego above-inflation rates in return for earning a certain rate of interest on their savings. These savers should regularly check our savings comparison charts to ensure that their money is deposited into the best rates possible.

Rachel Springall, finance expert at Moneyfacts.co.uk, said: “The murmurings of a base rate rise could mean a further uplift to interest rates, but savers would be wise not to wait around for this to come to fruition. Competition among challenger banks and building societies is evident in the top rate tables and savers would be wise to act with pace to take advantage.”