On the face of it, the latest rise in prices is unequivocally bad news. Inflation climbed to an eye-watering 3% in September, thanks in large part to huge increases in the cost of food (the price of fish, for example, is up almost 14% since a year ago) and the rising price of fuel. But that’s only half the story - there are some clear winners and losers from today’s inflation numbers, with some very important long-term implications for our savings and investments.

Here are five important things you should know about today’s inflation figures:

  1. The squeeze tightens
    With price rises now one percentage point above the Bank of England’s 2% inflation target, governor Mark Carney may very soon be penning a letter to the Chancellor. The Bank of England Governor is required to write to the Chancellor if inflation is more than a percentage point above or below target, explaining the reasons why. But this will be cold comfort to cash-strapped consumers, as today’s inflation figure marks the biggest squeeze on UK households in five years - inflation has not been at this level since April 2012.
    Life is getting much more expensive with an increase in the cost of food and transport the biggest factors behind September's inflation rise. Meanwhile, our pay packets have stagnated with wage growth falling behind price increases, despite UK unemployment being at a record low. That means as each month rolls by, we’re getting progressively poorer.
  2. It won’t last forever
    If that all sounds a bit depressing, the silver lining is that it won’t last forever. Inflation in the UK might be on the up, but the driving force behind this has been a weak pound following the Brexit vote, and soon this will fall out of the year-on-year calculation. This uptick in inflation is more than likely to be fleeting given the structural, long term economic factors beyond the control of central banks. An aging population limits the size of the global workforce, which by corollary suppresses economic activity. Then there’s increasing inequality and the rise of self-employment. Less money to spend means less economic activity driving prices upwards. Remember, you need a bit of “good inflation” to kickstart an economy.
  3. Retirees: the winners
    It’s worth noting that September’s inflation figure matters hugely to both retirees and savers. Under the government’s ‘triple lock’ guarantee, the state pension will rise in April each year by whichever number is the highest out of the September CPI inflation number, average earnings or 2.5%. With inflation running higher than either wages or 2.5%, this will determine the rise in the State Pension next year, arguably making retirees the biggest winners from today’s inflation figure.
  4. ISA investors take note
    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.
  5. Rate rise or not?
    The Bank’s Monetary Policy Committee has spent the past few weeks warning that interest rates may have to rise, with the first move coming as soon as this year. With inflation running high this is no big surprise If the Bank of England does raise rates at next month’s Monetary Policy Committee meeting, it will be the first time it has done so in over a decade.

However, the Bank also has been consistent in its warnings that growth in the UK is weak and vulnerable should borrowing costs rise too fast. Not to mention the uncertainty caused by Brexit and the persistant problem of low productivity. If rates do rise, expect any increases to be slow and gradual. A crawl towards ‘normalisation’, rather than a lift-off.

Important information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Eligibility to invest into an ISA and the value of tax savings depends on personal circumstances and all tax rules may change. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.