Bank expected to act next month
Interest rate rise more likely as inflation hits 3%
Official data shows the cost of living at its highest since April 2012.
Prices have risen on the back of the falling value of sterling and this may signal a 0.25% rise in interest rates.
Economists expect the Bank of England to instigate a rise anyway to help curb consumer borrowing.
Inflation rose from 2.6% in July to 2.9% in August and is outstripping wage growth. A 3% rise will be good news for pensioners as the basic state pension is protected by triple lock and will rise if the rate is above 2.5%.
Bank of England government Mark Carney – who has always said he’s a fan of “forward guidance” – appeared to prepare the ground for a rate rise in an interview last Friday, though he held back from suggesting it could come next month.
Calum Bennie, Scottish Friendly’s savings specialist said: “Interest rates have to rise to help tackle inflation and the sooner this happens, the better.
“Mark Carney must recognise the wolves are now at the door and take action to strengthen the pound even though this may increase mortgage costs.
“Consumers have been dealt a double blow of poor income growth and rising shop prices over the past year. For many, this has increased dependency on credit, but with defaults now on the rise it’s clear that many families are finding it nigh on impossible to balance the books.
“Evidently, it’s not a lending hand they need from the Bank of England right now, but a savings one.”
Nick Dixon, investment director at Aegon said: “The Bank of England has hinted at an increase in interest rates in the coming months, sentiment likely to gain traction following today’s announcement that inflation has reached 3%.
“While there are signs of a slowing economy, with sterling still at risk as Brexit negotiations remain inconclusive the British economy remains vulnerable to further inflationary forces.
“These pressures could become embedded through increasing demand for higher pay – especially in the public sector – without the political will for matching tax increases. Looser government spending will force monetary policy to take the strain, meaning higher interest rates which we believe are not currently reflected in market expectations.”
Maike Currie, investment director for personal investing at Fidelity International, said: “With price rises now one percentage point above the Bank of England’s 2% inflation target, governor Mark Carney will be penning a letter to the Chancellor explaining why inflation is so far above target.
“Life is getting much more expensive with an increase in the cost of food, fuel and a last-minute price spike in flights all contributing to the rise in inflation. Meanwhile, our pay packets have stagnated with wage growth falling behind inflation, despite UK unemployment being at a record low.
“September’s inflation figure is also used to determine how much investors and savers will be able to shelter in an ISA each year and by how much a number of benefits are increased in the new tax year, and in theory today’s number means welcome increases.
“However, expect all eyes to be on Philip Hammond’s Budget Speech in late November to see if the Chancellor confirms the state pension and ISA allowance increase.”
Oil prices held near their highest levels in almost three weeks after Iraqi government forces captured the major Kurdish-held oil city of Kirkuk in a response to a Kurdish independence referendum, raising worries about oil supply.
Brent crude fetched $57.84 per barrel, flat on the day after rising to as high as $58.47 on Monday.