UK inflation stuck at 6.7% – ‘Reality check for the BoE as ‘stubflation’ persists’

The UK rate of inflation stayed at 6.7% in September, the same rate as August, according to the Office for National Statistics; it means prices are still rising at the same rate as the previous month

Petrol and diesel costs kept inflation up, the ONS says, but food and non-alcoholic drink prices fell for the first time since September 2021; milk, cheese and eggs are among the products that went down the most, and the price of household appliances and airfares also fell.

Reacting to the latest figures, Chancellor Jeremy Hunt says “inflation rarely falls in a straight line”; he pledged to stick to the government’s promise to get the main rate of inflation to 5% by the end of the year.

Here are some initial comments on today’s inflation figures from personal finance experts:

Rob Morgan, Chief Investment Analyst at Charles Stanley, comments: “Today’s data highlights the stubbornness of UK inflation, especially energy costs and services which will keep the Bank of England on its toes about the possibility of further interest rate hikes.

The Consumer Prices Index (CPI) rose by 6.7% in the 12 months to September 2023, the same rate as in August when it surprised slightly on the downside. While that was a step in the right direction this represents a partial step back for the BoE, which is trying to bring it down to its target level of 2%.

It was a case of ‘what might have been’ as a rise in energy prices driven by supply cuts and geopolitical tension offset some of the falls in other areas. But the greater worry is that core CPI, which excludes volatile energy and food prices, receded only slightly to 6.1% from 6.2% and services inflation rose to 6.9% from 6.8%, indicating that inflationary forces remain embedded in some areas.

Added to the persistent surprise in the strength of wage growth it means the Bank must remain vigilant in its fight to get inflation back to target. The next interest rate decision is now more finely balanced than previously assumed.

The UK’s inflation peak was higher than in other developed economies and its path back down is going to be longer as well. While progress is being made, with services prices and wages still rising inflation will probably not reach target until the back end of 2024. It will take a prolonged period of higher rates to achieve this, though further hikes will probably not be needed.

What does it mean for interest rates?

There are two more interest rate announcements to come this year on 2nd November and 14th December. Despite wage growth remaining robust and a bump higher in fuel prices, on balance it looks likely the BoE will continue to pause rates for the time being to consider more economic and inflation data.

Inflation is forecast to subside towards 4% by the year end, aided by weaker economic growth and cracks appearing in the jobs market. The Bank would be happy with this trajectory, but today’s inflation reading will provide some discomfort that a further turn of the interest rate screw will be required. It will highly be vigilant of the month-on-month numbers going forward, as well as the various external factors that could cause prices to veer off course. A continuation of strength in wages, a weak sterling, and a buoyant oil price all remain concerns.

Whether the current base rate of 5.25% represents the high-water mark for interest rates remains to be seen. What is more obvious, and important, is that it will not be retreating rapidly. The 2% target for inflation is not likely to come into view until the end of 2024 at the earliest, which tight monetary policy will be necessary throughout next year. The BoE will most likely have to hold rates higher for longer than the Fed and the ECB.

What does it mean for savings, housing, and mortgages?

Higher rates have been a welcome tonic for savers compared to the dismal returns of much of the past decade. Going forward there could be a better picture unfolding. Inflation is forecast to subside towards 4% by the year end while interest rates are anticipated to remain above 5% to ensure they do, resulting in meaningful inflation-beating returns from cash for the first time since 2008.

The flipside is mortgage rates are likely to remain high, maintaining the pressure on borrowers, dampening homebuyer demand and weighing on UK property prices. Just as ultra-low interest rates helped fuel house price rises, higher rates are now pulling them back down. This is so far trumping decent wage growth in dictating affordability.”

Most people’s savings are still losing value in real terms…

Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “The light at the end of the tunnel is still a long way away. Inflation is proving very sticky, remaining at a level that will keep many households on their toes.

“Inflation does more to individuals’ finances than just increase the costs of their utilities and the weekly shop – prolonged periods of high inflation diminish the value of savings in real terms. Thankfully, we’re in a position now where higher interest rates mean opportunities to achieve competitive returns on savings. But crucially, as many consumers will be acutely aware, not all banks have been passing better rates on to savings customers, essentially triggering a ‘loyalty penalty’ for savers who do not shop around.

“As inflation and interest rates continue to shift, the onus is on consumers to consider where best to put their money to maximise returns. The gap between the best and worst savings products is vast, so anyone with a reasonable savings pot must assess which providers and products can help them grow it.”

Supermarkets’ greedflation remains a real threat to shoppers…

Mohsin Rashid, CEO of ZIPZERO, said: “The headlines are clear: inflation remains a huge issue. Every day goods continue to get more expensive at a fast rate, and today’s data provided no silver lining. A dark cloud still hangs over people’s finances, with many struggling to afford even the most basic necessities like groceries as inflation remains sky high.
 
“Those unable to fill their shopping trolleys or feed hungry mouths cannot wait years for inflation to crawl back to bearable levels – support is needed now. At least food inflation has slowed of late, but it’s still time for supermarkets to do away with ‘greedflation’ and start offering shoppers savings that truly help their pennies stretch further.
 
“For the government, keeping a fair and watchful eye over prices is key to helping Britons get back on top of their finances. Today’s figures underline that much more must be done.”

Government failing to support those in or planning for retirement…

Lily Megson, Policy Director at My Pension Expert, said: “They say consistency is key, but this isn’t the case today. Over a year-and-a-half riddled with economic challenges and sticky inflation, the cost-of-living crisis has left households grappling with uncertainty.
 
“We all know that there will be no quick fix to this. However, Britons would likely feel more confident if there was a strategy in place to help ease the financial burden – but this does not seem to have come to fruition. In fact, My Pension Expert’s recent survey revealed that most (56%) UK adults believe the government lacks a clear strategy for improving outcomes for UK pension planners.
 
“It is therefore vital that savers take advantage of all the support available to help them understand their financial situation and plan for the future. Guidance or even better, independent financial advice, could equip savers to navigate this challenging economic climate. Understanding that help is readily available, and that people don’t have to tackle financial uncertainty alone, is vital.”

No room for complacency; people must diversify their savings and investments…

Jatin Ondhia, CEO of Shojin, said: “As inflation had been falling, and the Bank of England paused on its base rate hikes, there had been a sense of cautious optimism returning – a sense that we may have turned a corner after two years of economic turbulence. Today’s data will dent that confidence. 
 
“Clearly, there is a long way to go to properly stabilise the economy and financial markets. So, prudence must remain the guiding principle for investors and, to that end, diversification continues to be a likely strategy for many, serving as a safeguard against market volatility. Indeed, investors must continue to be proactive, exploring all the different options available to them.
 
“It is still difficult to say where inflation and interest rates will go in the medium to long term. People must maintain control over their financial decisions, ensuring that each decision – whether for their savings or investments – aligns with their own risk tolerance and long-term financial goals.”

Ben Thompson, Deputy CEO of Mortgage Advice Bureau, said: “Inflation remains unchanged, adding more pressure on the Bank of England to hold interest rates where they are – at least for the next announcement. While rates remain high in comparison to recent history, the rates on offer from a host of big lenders have already reduced to sub 5%. However, as swap rates harden and the possibility of higher for longer interest rates sets in, it is unlikely that these rates will drop further anytime soon. For those in the process of buying or looking to remortgage, it remains critical to seek mortgage advice to find the right deal for you.”