Inflation at 11.1%: What this means for your personal finances

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, comments:

“Inflation at 11.1% - a 41-year high - is extremely difficult for consumers to digest when you consider all the other challenges hammering household finances at the moment– from rapidly rising interest rates to falling real incomes, a looming recession and the prospect of higher taxes in this week’s Autumn Statement.

"October’s figures were largely driven by rising gas and electricity prices despite Liz Truss’s Energy Price Guarantee, as well as higher food and non-alcoholic prices, which rose by a staggering 16.4% on the year to October, up from 14.6% in September, as inflationary pressures on ingredients, labour and transportation drove up costs in the food industry.

“Declining disposable incomes have become the norm since runaway inflation really took hold following Vladimir Putin’s invasion of Ukraine in March. But inflation has been on the rise since the second quarter of 2021 when pandemic-fuelled supply chain shortages converged with soaring consumer demand as economies reopened from lockdown.

“Since then, every jump in prices has piled more and more pressure on UK households, with many simply trying to get through each month with their finances intact never mind considering longer-term goals such as buying a house or retirement.

“Looking ahead, the Bank of England expects the headline inflation rate to fall sharply from the middle of 2023 and halve from the current level by the fourth quarter, However, with inflation largely caused by global challenges, such as the war in Ukraine and the resulting energy price increases and food shortages, there’s never any guarantees. The past three years have already us shown that major global events, such as the pandemic and Putin’s war with Ukraine, can surprise us all.

“Domestically, however, with new Chancellor Jeremy Hunt expected to roll out a raft of tax rises this week, interest rates at 3% and expected to jump again this year and mortgage costs still high compared to the past decade, it is likely that inflation will ease from here."

“High inflation is a nightmare for household finances, as it erodes spending power, gnaws away at savings and makes it very hard for people to maintain their living standards because their incomes simply don’t stretch as far.

“Throw in higher borrowing costs as interest rates continue their upward trajectory and the prospect of higher taxes and household budgets are getting squeezed in every direction.

“With higher energy and food prices the main cause of October’s sky-high inflation figure, consumers need to be much savvier about their energy consumption at home and their weekly shop, ditching favourites such as Heinz Tomato Ketchup, which has shot up 53% since 2020*, for cheaper supermarket own brands, using scanners to track expenditure around the store and planning meals for the week ahead to reduce waste.

“While Liz Truss’s cap on energy bills this winter – with the rebate period since curtailed to April next year from April 2024 – has not entirely stopped inflation trending upwards, it has prevented it from spiralling completely out of control, so October’s inflation figure could be the peak.

"But consumers can’t relax just yet. Yes. Inflation is expected to ease, but the reality right now is that the things you spend now are 11.1% more expensive on average than they were a year ago. While everyone’s inflation number will be slightly different to the headline figure generated by the ONS, which tracks a virtual basket of 700 items, as it depends on the specific goods and services you buy, the message is clear - people need to draw up a budget to ensure they continue to live within their means and don’t take on expensive debt.

“Securing a pay rise won’t ease the pain either. While wages are rising at their fastest rate since 2000, with regular pay up 5.7% in the year to September, when adjusted for rising prices, real pay actually fell by 2.7%. So, unless workers can make an inflation-beating job move, they will find the purchasing power of their take-home pay is still severely compromised.”

What high inflation means for savings and pensions

“High inflation is bad news for savers who are looking for a decent return on their cash. While savers are gaining from much better rates than they have seen in more than a decade, inflation of 11.1% will quickly eat away at their nest eggs.

“However, with the BoE expecting inflation to halve by this time next year, locking in the best fixed rate now will pay off over the longer term as the gap between pay growth and inflation narrows.

“With the top easy-access account now at 2.75% and fixed deals of up to 5% - some savers may be tempted to hold off on locking their money away if they feel there are more rate rises to come. But there are never any guarantees, and they risk missing the peak if they wait too long.

“With inflation expected to come down and the best three and five-year fixes only paying slightly better interest rates than two-year deals, it might be wise to stash cash for a shorter period. This gives them more flexibility to switch if better rates then crop up.

“For those with a longer-term savings plan, the troubling economic environment might deter some people from increasing their pension contributions or upping their investments. But making cuts today to preserve cash for short-term needs can jeopardise financial futures.

“Yes, cash savings are important because everyone needs a rainy-day fund, but when you invest in the financial markets, you are sending your money out to work on your behalf and over the long this has the potential to deliver an inflation-beating return.”

* According to Which?