Inflation set to rise next week - what it means for your pensions, savings and investments

Britons are warned that the July figure could be the month that inflation starts to edge higher, because the pace of decline in utility prices is much weaker than a year ago.

Steve Clayton, head of equity funds at Hargreaves Lansdown said: " Markets know that weaker utility prices could let stubbornly persistent services inflation make more impact on the overall number. And if the figure comes in no worse than 2.3 per cent, we doubt investors will be too spooked by an edging up.

"Any signs of weakening service sector inflation will also be taken positively. But if we see prices ticking up much above that 2.3 per cent level, investors are likely to start scaling back their expectations of how far and how fast the Bank of England will be able to make further reductions in their base rate.”

Investors will not be the only people watching these figures and savers, homeowners and pensioners will be affected by this announcement next week too.

In August, the Bank of England cut rates to five per cent. But Bank of England Governor Andrew Bailey warned: "We need to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much."

Although the headline CPI figure has hit the two per cent target, the Bank also considers other measures of inflation, external when deciding how to change rates, such as "core inflation".

In its latest forecast for the global economy, the International Monetary Fund (IMF) warned that persistent inflation in countries including the UK and US might mean interest rates have to stay "higher for even longer".

July’s Consumer Price Index inflation data will be released on August 14, 2024.

What does this mean for your savings and mortgages?

An expert has reassured Britons that the expected rise in inflation is unlikely to "frighten the horses", so it shouldn’t have an impact on the Bank of England’s rate-setters yet.

The Bank of England has issued plenty of warnings that a rise in inflation is on the way due to energy price cap changes.

However they explained this won't affect their decision too much as they are prioritising secondary effects such as core inflation, wage inflation and services inflation are reasonably under control

The market’s expectations are baked into savings and mortgage rates, so they’ll only shift significantly if they get "a notable surprise.,” Sarah Coles, savings expert at Hargreaves Lansdown explained.

What it means for pensioners

Inflation is expected to increase but this is still way lower than it has been in recent years.

In October 2022, inflation hit 11.1 per cent, which was the highest rate for 40 years. In June 2024, prices in the UK rose by two per cent in the year, unchanged from May, which was the lowest figure for almost three years.

However, that doesn't mean prices are falling - just that they are rising less quickly.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said explained the small rise in inflation is offering some much needed "breathing space" for pensioners who have had their budgets sorely stretched.

She said: "Lower inflation is also good news for the new Labour government. Inflation is one factor used in the state pension triple lock formula and has contributed to some blockbusting increases in recent years.

"This year the figure used is likely to be wage growth, delivering a much lower increase to state pension that will still beat inflation."

Even though inflation has fallen back massively it remains an important factor in people’s retirement planning. They could be retired for twenty years or more and they need to do what they can to preserve its purchasing power.

Britons in the market for an annuity can get level annuities which offer higher starting incomes than their inflation linked counterparts.

However, it should be noted that a product linked to prices will grow over time whereas a level one won’t.

The latest data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,215 per year from a level single life annuity with a five-year guarantee. One linked to RPI on the other hand offers up to £4,541 as a starting income.

Morrissey continued: "It’s a difference that may put many people off, but you need to consider the fact that inflation can move massively during the course of your retirement, and you may catch up in terms of income faster than you thought.

"Should high inflation return, the purchasing power of the level annuity income that once seemed so attractive could be severely stretched.

"Alternatively, if you don’t want to go down the inflation-linked route you can look at annuitising your pension in slices over time. This enables you to secure higher incomes while you age while allowing the rest of your pension to remain invested and grow.”