What the latest inflation figure means for mortgages, savings and investments
Inflation measured 1.7pc in September, down from 2.2pc in August.
It’s the first time CPI inflation has measured below the Bank of England’s 2pc target since April 2021, and will likely be a positive influence at its next meeting to decide whether interest rates should be dropped again.
The central bank finally cut the Bank Rate in August for the first time in four years, down from 5.25pc to 5pc.
The market anticipates one or two more small rate cuts before the end of the year – meaning the Bank Rate could drop to 4.5pc.
This could have a significant impact on your finances – including savings, mortgages and investments. Here, Telegraph Money explains what your options are.
What is inflation?
Inflation is the term used by economists and governments to describe the speed at which prices are rising.
In Britain, we usually measure inflation by comparing the price of a particular item to its price at the same time the previous year.
For example, if a chocolate bar costs £1 in September 2023 and then in September 2024 it costs £1.04, its price has risen by 4pc and thus inflation for this particular item stands at 4pc.
However, statisticians have to calculate the pace of price rises across the whole of the economy and use a variety of methods to estimate this as accurately as possible.
The most closely followed of these methods used by the Government and the Bank of England (BoE) is the Consumer Price Index, often abbreviated to CPI, which is published each month by the Office for National Statistics (ONS).
This calculates inflation based on a basket of hundreds of goods and services, which statisticians at the ONS update every year.
What does the latest inflation figure mean for your mortgage?
Mortgage rates have remained high over the past two years, adding financial pressure across the housing market.
For first-time buyers, higher rates of borrowing have made it harder to get on the housing ladder, while existing homeowners face a mortgage shock when coming off ultra-low fixed rate deals and on to new loans at today’s rates.
The average two-year fixed rate mortgage is currently 5.37pc, according to analyst Moneyfacts.
Fixed-rate and variable-rate mortgages are linked to the Bank Rate, although not necessarily directly.
Indeed, in recent days some lenders, including NatWest and Santander, have chosen to increase mortgage rates for the first time in three months, thanks to higher swap rates. Influences on these include nervousness ahead of Labour’s first Budget on October 30, and potential increases for government borrowing.
Some tracker mortgages are linked to the Bank Rate, often sitting one or two percentage points above it, while fixed rate mortgages are priced based on swap rates – market expectations of where the Bank Rate will be at a certain point in the future.
Despite all this, it’s still expected that the Bank Rate will still see at least one more cut before the end of the year.
Jonny Black, chief commercial and strategy officer at abrdn adviser, said: “This is a promising sign for rate setters. Andrew Bailey has hinted that if the positive inflation trend continues, we could see a bolder approach to cutting interest rates.
“But with the geopolitical landscape remaining turbulent, there’s risk of volatility that could lead to sharper price rises. Advisers remain essential. Their counsel will help clients to feel confident that their strategies can weather any storm.”
If you’re due to remortgage soon, our mortgage cost calculator can tell you how a new deal will affect your monthly bills.
What can you do if you need to get a mortgage?
For homeowners coming to the end of their fixed-rate mortgage it is important to remember you can start reviewing your options three to six months in advance and lock into a deal without committing to it. If rates then go up before you need to finalise your loan you are safe, but if rates fall in the interim you can choose a better rate.
Nicholas Mendes, of mortgage broker John Charcol, said: “For mortgage holders with less than six months remaining on their fixed-rate deal, it is advisable to start reviewing your options now.
“Many lenders allow you to lock in a new rate up to six months in advance, which could shield you from potential further increases.”
Mr Mendes also notes that the recent changes don’t necessarily mean the direction of travel for rates over the next year has moved and the long term direction is still positive.
What are the best deals on the market?
For first-time buyers looking to borrow up to 90pc of the house price, the best deals on the market include Progressive Building Society’s two-year fixed rate at 4.69pc with a £995 product fee and Barclay’s five-year fixed rate at 4.34pc with a product fee of £999.
For those with 25pc equity looking to remortgage First Direct’s two-year fixed rate at 3.94pc with a product fee of £490. If you have 25pc equity and are looking to fix for five years Santander has a deal at 3.78pc with a product fee of £999.
If you are remortgaging or buying for the first time with 40pc equity, Santander is offering a two-year fixed rate of 3.89pc, with a £999 product fee. If you are looking to fix for five years with 40pc equity, another deal from Santander has a 3.78pc rate deal with a £999 product fee.
What does falling inflation mean for your savings?
Lower inflation brings both good and bad news for savers. With inflation at 1.7pc it is very easy to beat it with the current rates on the market.
The average easy access savings rate is currently 3.07pc, according to Moneyfacts, but the most competitive accounts still pay around 5pc.
This is a positive, since inflationary price rises eat into the value of savings – put simply, if your savings aren’t matching or exceeding inflation, the rising prices mean your money won’t be able to buy as much as it previously could. Our inflation calculator can show you how much your savings are being eroded by price increases.
However, savings rates are unlikely to stay this high for long. Much like mortgages, savings rates tend to rise and fall with the Bank Rate – and providers have already started to reduce rates following the Rate cut, and in anticipation of further cuts to come later this year.
What can you do about it?
As a minimum, you should check your current rates and make sure you’re beating the inflation rate.
Planning ahead, it might be a good time to commit to a fixed-term account if there’s cash you won’t need to access for at least a year.
“It is crucial savers keep on top of the changing market and make the switch to ensure they are not getting a raw deal, especially as we have seen some of the top rate deals drop below 5pc,” says Caitlyn Eastell of Moneyfacts. “It would not be too surprising to see more providers adjusting their rates in reaction.
“Since the previous inflation announcement, fixed rates have faced further reductions, so it may be wise for savers to begin considering locking into an interest rate while the majority continue to pay competitive returns.”
What’s the best deal on the market?
For easy access accounts, Cahoot Sunny Day Saver is offering 5pc, with no minimum deposit, according to Moneyfacts, up to £3,000. Interest is paid annually on the account’s anniversary.
For a fixed account, Union Bank of India pays 5pc for a one-year bond, with a minimum deposit of £1,000.
Longer-term bond rates, which usually pay more, currently have lower rates – but could still be worth considering if rates start to fall more widely later this year. You can get 4.4pc from Atom Bank for a five-year fix.
What does it mean for your pensions and investments?
The stock market is not officially linked to inflation or the Bank Rate, but as both are significant indicators of the state of the economy, they can have a big impact on investor sentiment.
Rachel Winter, partner at wealth manager Killik & Co, said: “The return to below-target inflation for the first time since 2021 suggests the Bank of England’s tactics have worked almost too well. But we should not take stability as a fait accompli – with the UK Budget and the US presidential election now less than a month away, market volatility in the short term remains likely. Both these events could affect the exchange rate between the pound and the dollar, and this could have an impact on UK inflation. The UK is heavily reliant on imports, and these imports become more expensive when the pound is weak, and cheaper when it is strong.
“Against this difficult landscape, the Bank of England needs to balance a complex cocktail of factors before voting for more interest rate cuts. For investors, the ongoing uncertainty underscores the need for a well-balanced portfolio. As volatility persists, diversification remains critical to mitigate risks from sector-specific disruptions.”
Inflation may impact retirees, or those who are due to retire soon, due to its impact on bonds. Pension “lifestyling” strategies tend to move towards less risky investments as you reach retirement, in order to shield your money from market fluctuations – often, this means increasing your proportion of bonds.
Bonds become more attractive in periods of rising inflation as the value of the income in real terms is increased. This is good news for those who already hold bonds, but more expensive for those who are yet to buy.