Inflation at 6.7% but state pension set to increase at 8.5%

The rate of inflation for September, as measured by the Consumer Prices Index (CPI), failed to fall as was anticipated, sticking at 6.7%. Experts had expected to see it tick down for the fourth month in a row, to 6.6%. The reason for this stickiness is largely due to rising fuel costs at the petrol pump once again, although there is hope that the stats will see a big drop for the month of October, when the new lower energy price cap will take effect.

Hopefully we’ll also see the cost of food continue to come down. The annual inflation rate of food and non-alcoholic beverages fell from 13.6% to 12.1% - still eye wateringly high - but it does mean that the prices across a range of items have eased, which is good news.

State pension is still set to increase by 8.5%

The latest CPI figure means that the state pension should be set to increase by 8.5% which is the official wage growth inflation rate to be referred to for the latest triple lock this year. Under the government’s ‘triple lock’ pledge, the state pension will increase each year by the largest of either inflation, as measured by CPI, wage growth inflation or 2.5%.  And last month, when the wage growth figures for May to July 2023 were announced, the Prime Minister, Rishi Sunak, signalled that he was committed to maintaining the triple lock promise.

That said, according to an article in the Daily Mail, Whitehall officials could be looking to amend the calculations, arguing that wage growth inflation was distorted by between 0.5% and 1% due to one-off bonuses paid to NHS staff and civil servants and other wage settlements.

So once more, pensioners will have to wait and see what their state pensions will rise by in April.

How does inflation affect savers?

Sticker inflation could mean that the Band of England’s plan for dealing with the UK’s persistent inflation is to hold interest rates at high levels until the inflation threat has passed. The bank’s chief economist Huw Pill has labelled the strategy “Table Mountain”, an allusion to the flat-topped landmark in South Africa.

But that doesn’t mean that some savings rates haven’t peaked. Of course things could change, but at the moment the top fixed term bonds rates are falling. At the same time, there is still some positive competition between variable rates accounts, as our Rates Rundown article illustrates, so do have a look to see if you can do better.

Of course, if the interest rate you are earning on your cash savings is less than inflation, the pounds in your pocket will not keep up with the increasing costs of some of the items you wish or need to buy. But that is why it’s so important to make sure you are earning as much as you can.

We haven’t done it for a while, but it’s worth showing you the difference it can make to helping your savings keep up with inflation.

As our calculator below shows, the effect of higher inflation can be so damaging to cash savers. With inflation at 6.7%, those with cash sitting in their current account earning nothing could see their hard-earned cash halve in the real value – so its spending power - in just ten years!

It remains vital for savers to choose the highest-paying accounts to try and mitigate the effects of inflation.

Based on the current CPI rate of 6.7%, if you leave your funds languishing with one of the worst paying easy access accounts - Virgin Money’s Everyday Saver is paying just 0.25% - a deposit of £50,000 would have fallen to just £46,978 in real terms in just one year.

If you were to choose the best easy access account available today, paying 5.30% AER, while the real value of your money would still be a little lower, it would be worth £2.366 more, at £49,344. Better still if you earn the best 1-year rate available today paying 6.11% (Union Bank of India), it would be worth £2,746 more at £49,724. Would you say no, if someone offered to give you that sort of money for half an hour of your time, which could be all it takes to move your cash from one provider to another?

For more information about how inflation may be eroding your savings, take a look at our inflation calculator:

If you’ve not reviewed the interest you are earning on your savings accounts for a while, it could be time to see if you could be earning more – helping your cash to keep as close as possible to the rising cost of living, so that you are not losing your buying power.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The accounts and rates mentioned in this article are accurate and correct as of 24/10/2023.

Savings Champion and their associated services are not regulated by the Financial Conduct Authority (FCA).

The Financial Conduct Authority (FCA) does not regulate cash advice.