Inflation has risen well above the Bank of England’s 2 per cent target, and is expected to stay there for many months
Inflation rose to 3.5 per cent in the year to April, according to figures released by the Office for National Statistics (ONS) on Wednesday.
The Consumer Prices Index (CPI) measure of inflation is now at the highest level it has been for over a year. The figure was 4 per cent last January and 3.4 per cent the following month. It was 3.2 per cent last March.
The figure released today is well above the Bank of England’s 2 per cent target level.
Economists had widely predicted that inflation would rise – partly due to an increase in energy prices last month – though consensus was that it would rise to around 3.3 per cent.
Core CPI, which is CPI excluding energy, food, alcohol and tobacco, rose by 3.8 per cent in the 12 months to April 2025, up from 3.4 per cent in the 12 months to March.
Food and non-alcoholic beverages inflation stood at 3.4 per cent, up from 3 per cent in March’s reading.
ONS acting director-general Grant Fitzner said: “Significant increases in household bills caused inflation to climb steeply.
“Gas and electricity bills rose this month compared with sharp falls at the same time last year due to changes to the Ofgem energy price cap.
“Water and sewerage bills also rose strongly this year, as did vehicle excise duty, which all pushed the headline rate up to its highest level since the beginning of last year.”
What will happen to inflation in the future
Inflation is widely expected to stay high this year, but economists are divided on how high it will reach.
Some, such as Pantheon Macroeconomics, suggest the figure could hit 3.7 per cent by September, but will stay above 3 per cent until next spring.
But others, such as economist Andrew Sentance, believe that it could even reach 5 per cent.
In a report this month, the Bank of England said previous increases in energy prices are still likely to drive up CPI inflation from April onwards and that it would peak at 3.5 per cent in the third quarter of the year. That figure has been reached already.
What does it mean for interest rates?
Higher inflation means prices are rising quicker than otherwise, and this can prompt the Bank to keep interest rates higher for longer.
Interest rates are currently at 4.5 per cent after being cut in February, held in March and cut again in May.
Even though inflation is still well above the Bank’s 2 per cent target, there is an expectation that there will be further rate cuts later this year.
But that is not guaranteed. On Tuesday, the Bank’s chief economist Huw Pill said the Bank had been cutting rates too quickly.
Given the figure is a little higher than expected, it is possible interest rates may be cut at a slower rate than previously predicted.
What does this mean for mortgages, savings and pensions?
Mortgages
Mortgages are not directly affected by inflation, although many products are affected by the Bank’s base rate, which inflation influences.
Tracker products and standard variable mortgages change directly when interest rates change.
Fixed mortgages tend to follow swap rates, which work on long-term predictions for where the base rate will go.
Mortgage rates are broadly expected to fall throughout the year, though there has been a small uptick in recent days.
Given Wednesday’s inflation figure is higher than some economists predicted, there is a chance that mortgage rates would not fall quite as quickly as some economists predicted, and some lenders could increase their rates.
Savings
High inflation is bad news for savers as it erodes the value of money held in the bank. Therefore, the lower the rate, the better the news for savers.
The effects of inflation on the Bank’s interest rate also affects savers, because of the base rate’s influence on savings rates.
Experts believe we are “past the peak” for savings, though there are some high rates that can still be snapped up.
For example, Chip offers an easy access cash ISA worth 4.85 per cent – well above inflation – though this includes a temporary bonus rate.
Atom Bank offers a savings account paying 4.75 per cent, though the rate drops in months you withdraw money.
Pensions
Higher inflation can eat into pensioners’ savings.
To give a working example, if you are 67 and plan to retire in a year, assuming you have a pot of £87,500 in today’s money – roughly the average an over-50 will have by retirement, according to Pension Bee – then one year later, if inflation runs at 3 per cent, and your investment growth is 3 per cent, your pot would be worth £90,125.
But in real terms, it would be worth exactly the same as it is today, because inflation has eaten away at the potential growth.
Another factor to be aware of is the impact of inflation on annuity rates.
Annuities offer a guaranteed annual income in retirement. They offer an alternative to drawing down money from a pension pot, which could eventually run out, particularly if a retiree lives longer than expected.
While they have been unpopular in recent years, rising interest rates have improved the annual incomes someone can buy.
But for retirees opting for one, time may be of the essence. With the Bank expected to cut interest rates further, rates may fall.