Inflation dips to 9.9%: What this means for consumers, their savings and pensions

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

“The surprise dip in inflation to 9.9% in the 12 months to August from the 10.1% seen in July is largely driven by the falling price of motor fuels as motorists finally feel some respite at the pump.

“While a decline in Inflation, albeit minimal, might sound like an improvement, consumers cannot relax just yet. Household finances are still being eroded by the skyrocketing price of groceries with food and non-alcoholic beverage prices rising by 13.1% on the year to August, up from 12.7% in July.

“The good news is that inflation should not edge up much more from here following Liz Truss’s decision to freeze energy bills at £2,500 for the typical household this winter and next – a move that should shave several percentage points off CPI in the months ahead.

“However, the fiscal move from the Government is unlikely to prevent the Bank of England, from raising the base rate by an expected 50 basis points to 2.25% at its meeting next week as it strives to contain rampant inflation and ward off any fallout from people having more money in their pockets.”

“Inflation of almost 10% makes it extremely challenging for people to budget effectively as their spending power is being compromised. Households should conduct a deep dive into their spending patterns if they want to maintain their way of life – prioritising needs over wants to ensure their finances stay afloat as winter draws in.

“While easing fuel prices and Liz Truss’s energy plan clubbed together with the cost-of-living handouts, such as the £400 rebate, may ease the burden for some through the colder months, saving cash-strapped households £1,000 a year on average, that does not mean people are not already struggling. Energy prices are much higher than they were a year ago and with the cost of groceries jumping by more than 12% in the past month alone, according to Kantar, household budgets are working harder than ever to stay in the black.

“Workers’ incomes are already failing to keep up with the rising living costs seen in recent months. While regular pay rose 5.2% on the year in the May to July period, when taking inflation into account it fell 2.8% meaning workers’ salaries simply don’t stretch as far.

“Some households have already slashed expenditure to the max, leaving them little wiggle room for those unexpected expenses that crop up. For those teetering on the edge of a debt problem, make clearing high-interest credit card balances a priority over saving or investing. You’re not going to outsave or outinvest an annual credit card rate of 20% or more.

"In a more positive spin, remember your inflation number may be lower than the headline rate as it depends entirely on what you spend your money on. The ONS calculates CPI from a virtual basket of 700 items to represent the goods and services that consumers typically purchase – from everyday buys such as milk and bread to big-ticket items such as a car or flights. If you don’t spend on the items with the biggest price rises, you may be looking at a lower personal inflation figure.”

“Consumers may now be able to find easy-access accounts with rates as high as 1.85% and fixed-interest rates of 3.75% - the highest level in more than a decade thanks to the BoE’s spate of interest rate rises - but this is still no match inflation of almost 10%.

“The only consolation is that the BoE is widely expected to raise the base rate again next week, a move that should see savings rates edge up further. The key for savers looking to mitigate the damaging effect of inflation is to shop around for the best deals on the market

“Remember, it is vital to have some cash set aside for life’s emergencies, particularly in this ever-present cost-of-living crisis. While the recommendation is to hold onto three to six months’ worth of monthly expenses, those with nothing set aside should strive to save a small amount towards that target every month. Each contribution, however small, will help to ease the financial stress that can come with having no backup funds in place.

“For pension savers, high inflation weakens their spending power, encouraging them to reduce or stop contributions as everyday bills take priority. But it is far more prudent to make cutbacks elsewhere as money directed towards pensions and investments has the potential to beat inflation over the long term.

“Stopping payments into a workplace pension or Self-Invested Personal Pension (SIPP) is never a good idea as your money misses out on the gift of free cash in the form of tax relief. This is automatically granted on taxpayers’ pension contributions at 20% of the amount going in, while higher rate taxpayers can claim back an extra 20% and additional taxpayers an extra 25% of the sum deposited – effectively giving your pension pot an inflation-beating bump up.”