Households are bracing for another spike in inflation, with price rises expected to peak at four per cent in September, leaving millions facing higher costs for months to come.
The jump could mean financial pain lingers for longer, leaving borrowers waiting months for relief and forcing savers and pensioners to rethink their money plans as the Bank of England prepares to hold interest rates at their current level.
The Bank of England is widely expected to keep interest rates at four per cent when its Monetary Policy Committee meets next week on September 18, with markets now betting cuts won’t come before Christmas – raising big questions for anyone with a mortgage, cash savings or approaching retirement.
Inflation Set to Hit Four Per Cent Peak
Inflation rose to 3.8 per cent in July and is expected to edge higher again in August before hitting a peak of four per cent in September – double the Bank’s two per cent target.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, warned: “Just like the weather, the temperature for inflation looks set to have been steamy in August. With food and grocery prices still on the boil there’s not likely to have been much cooling off.”
“As people ringfence budgets for small treats, spending on entertainment, holidays and favourite foods is likely to have kept upwards pressure on the Consumer Prices Index,” she added.
The Bank of England’s own forecasts confirm this gloomy outlook, with its August Monetary Policy Report predicting inflation will peak at 4.0 per cent in September before starting what officials hope will be a gradual decline back towards the two per cent target.
Interest Rate Cuts Now Look Distant
Ms Streeter delivered disappointing news for borrowers: “Inflation is expected to peak at four per cent this month, before starting a downwards drift. Even though we’re expecting bad news from the employment market, with every chance of more weakness everywhere from unemployment to vacancies, the Bank isn’t keen to cut at a time when inflation remains so stubborn.”
“So, borrowers look set to need lots more patience, given another interest rate cut is not likely this month or even by the end of the year.”
Markets now don’t expect another reduction until March 2026, a delay that will keep gilt yields higher and “cause continued headaches for the government, given it means borrowing costs stay elevated, keeping the public finances in a more fragile state,” according to Ms Streeter.
What It Means for Your Savings
After years of turbulence, savings rates are finally starting to settle into what experts call a “new normal.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, explained: “The savings market is tipping back towards normality. We’ve hit a peculiar juncture, where the most competitive deals across the board are all pretty similar.”
We’ve come through a long period where high interest rates in the short term were expected to be followed by cuts, so the best deals were available on easy access savings. Now rates are lower, and fell again last month, and because the easy access market is particularly sensitive to cuts, the best deals in this part of the savings market have fallen.”
Fixed-rate savings accounts have proved more resilient. Ms Coles advised that whilst the flexibility of easy access accounts can be appealing, locking into a fixed rate provides certainty at a time when interest rates are expected to fall further.
She said savers with money they won’t need immediately may benefit from fixing now, whilst deals of around 4.5 per cent are still available – though these opportunities may not last long as banks adjust to the new rate environment.
Mortgage Borrowers Face Mixed Picture
Mortgage borrowers may see some relief, though not the dramatic falls many had hoped for.
The average two-year fixed rate has slipped below 5 per cent, down from 5.2 per cent four months ago, according to Moneyfacts. But the Bank’s decision to hold rates means lenders are likely to move cautiously.
Hargreaves Lansdown’s Savings and Resilience Barometer found those who have recently remortgaged pay £88 more a month than those who have not, with almost three times as much of their borrowing on variable rates – leaving them particularly exposed to rate decisions.
Ms Coles acknowledged that although remortgaging has been “horribly painful” since rates began rising in 2022, the process “could be less painful in the coming months” as deals stabilise. However, with base rate cuts now looking unlikely until spring, many homeowners face months more of elevated payments.
Pensioners Watch Triple Lock Boost
Retirees are watching closely as the triple lock sets up another bumper increase to the state pension, though the timing couldn’t be more crucial given rising living costs.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “It’s an important time of year for retirees with a slew of data due out in the coming weeks that will define how much the state pension will increase by next year.”
With inflation currently at 3.8 per cent and wages at 4.6 per cent, the triple lock guarantee means pensions will rise by whichever figure is highest. Ms Morrissey explained: “Only time will tell which will be higher but if the highest figure proved to be 4 per cent for instance, then that would see the value of the full new state pension boosted by close to £500 a year.”
However, she warned of a catch: “Those in receipt of top ups such as the state second pension will find those elements rise in line with inflation rather than the triple lock – this is fine if inflation proves to be highest figure but if it’s beaten by wages then overall their state pension increase will be slightly lower.”
Annuity Rates Remain Strong
For those considering annuities, the outlook is more positive despite the challenging economic environment.
Ms Morrissey said incomes remain strong: “The latest data from the HL annuity comparison service shows that a 65-year-old with a £100,000 pension could get up to £7,793 per year from a single life level pension with a five-year guarantee.”
She added: “Interest rates are one factor impacting annuity rates and so the expected hold should mean incomes remain pretty solid and interest will continue to be high.”
This provides a rare bright spot for retirees looking to secure guaranteed income in uncertain times.
The Path Ahead
The Bank of England faces a delicate balancing act. Governor Andrew Bailey and his colleagues must weigh persistent inflation against signs of economic weakness, with their next decision on September 18 being closely watched by millions of households.
The central bank’s own analysis suggests this inflation spike should be temporary, driven by energy prices, food costs and what it calls “administered prices” – costs set by regulators or government. But with wage growth still running at 4.6 per cent annually, policymakers remain concerned about inflation becoming embedded in the economy.
For households, the message is clear: the cost of living crisis isn’t over yet. With inflation set to hit four per cent and interest rate cuts pushed into next year, families face months more of financial pressure before any meaningful relief arrives.
Follow for more updates on Britannia Daily
