Petrol price drop puts the brakes on runaway inflation

CPI inflation fell to 9.9% in August – down from 10.1% in July. Petrol price drop applies the brakes on accelerating inflation. Groceries still feeding inflation.

Energy powers inflation – but the Energy Price Guarantee means inflation will peak lower. Ten eye-watering price rises at the supermarket. What it means for your savings.

The ONS has released inflation figures for August: Consumer price inflation, UK: August 2022 – Office for National Statistics

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown: “Runaway inflation has paused for breath, after petrol prices pulled back in August. It feels like better news for anyone who has been wrestling with higher prices, but because petrol has driven the change, it offers little relief for those on lower incomes.

Petrol prices dropped back with the wholesale price of oil, as traders worried about the threat of a looming worldwide recession. The oil price is still elevated, because Russia’s invasion of Ukraine and the subsequent sanctions mean supplies are still much lower. However, it has fallen back from the peaks earlier this summer.

This hasn’t eased the pressure on lower earners. Petrol prices tend to be more of a concern for those on higher incomes, who may own more cars, drive more, and favour bigger gas-guzzlers. Meanwhile, those on the lowest incomes, who are suffering the most as a result of rising prices, are still facing impossible energy bills and horrible hikes in the cost of food.

Looking ahead, inflation is unlikely to be as bad as had been predicted before the Energy Price Guarantee. This will particularly benefit those who spend more on energy – which includes more higher earners – but will mean the horrendous hikes that had been announced for October won’t materialise. It’s likely to mean inflation peaks lower and sooner than had been predicted.

Core inflation – which strips out energy and food prices which are at the mercy of global markets – has risen very slightly to 6.3%. This is worth noting, because it will influence the thinking of the Bank of England: this is the inflation it is trying to control through raising interest rates. The fact it has crept up very slightly, despite rate rises, is likely to mean the pressure to raise rates again doesn’t ease significantly when the Bank meets to discuss rates next week.

Petrol price drop applies the brakes on accelerating inflation

Following July’s record increase, petrol prices fell back 14.3p per litre between July and August, so while the annual inflation for petrol was still 30.2%, it had eased from 42.9%. a month earlier.  Likewise, diesel had eased to 36.2%, down from 46.1% a month earlier. This contrasts with the same period last year, when life was returning to normal, demand was booming and prices were rising.

Groceries feed higher inflation

Food and non-alcoholic drink  played a major part in pushing prices northward, seeing their 13thconsecutive month of rising inflation. They were up 13.1% in a year, including some painful rises in the price of some essentials including low fat milk – which was up more than 40%, and butter, whole milk, and jam – up almost 30%. Food is the price rise we feel most keenly – with 96% of people saying their food costs have risen. This is one of the costs that hits those on lower incomes disproportionally hard, because once they have shopped around and traded down, the only option left is to buy less, which can mean some impossible decisions at the supermarket.

Energy powers inflation

Despite the welcome news of a limit to price rises in October, we’re still having to cope with gas bills that have almost doubled in a year and electricity prices which have risen by around half. At this level, 45% of people have found it at least somewhat difficult to pay their energy bills, and while October’s rise isn’t going to be as eye-watering as we had feared, it’s still going to burn a hole through an awful lot of household budgets.

Clothing and footwear

Inflation was up notably here too, to 7.9% overall and 9.2% for men’s clothes – largely as a result of a return to more normal selling patterns, where clothes for the new autumn season arrive in stock, and discounts evaporate. Last year we were still seeing the lingering impact of restrictions earlier in the year, so prices at that point rose only very fractionally – their smallest rise since 2008.

Ten eye-watering price rises at the supermarket

  • Low fat milk 40.4%
  • Butter 29.5%
  • Whole milk 29.4%
  • Jams, marmalades and honey 29.1%
  • Flours and other cereals 28.2%
  • Olive oil 26.6%
  • Margarine 25.6%
  • Sauces 22.6%
  • Cheese and curd 21%
  • Mineral water 20.9%

What this means for savers

The pause in inflation has very slightly narrowed the gulf  between savings rates and inflation, but this is a matter of inching closer across a yawning chasm. Moneyfacts figures show that the average 1-year bond has reached a ten-year high of 2.29%, and the average easy access rate has risen to 0.84%. However, clearly money in these accounts is still losing a big chunk of its spending power after inflation.

There are some savings we need to hold, and overall rates shouldn’t shake your resolve. We need an emergency savings safety net, which should cover 3-6 months’ worth of essential expenses for anyone of working age and 1-3 years for people in retirement. This needs to be in a competitive easy access savings account. It’s essential to shop around for a decent easy access account. It’s easy to think it’s not worth bothering because you can’t keep pace with inflation in any savings account right now, but there’s a world of difference between it languishing in an account with a high street giant paying a fraction of 1%, and switching it to a competitive bank offering over 2%.

To help close the gap on inflation, any money you need for planned expenses in the next five years still needs to be in savings, but can be fixed in return for more interest. Right now, the short-term fixed-rate market is offering particularly competitive deals, as smaller and newer banks compete hard for your one-year fixed term savings, so you can make almost 3.5% in these accounts.

You might be hesitant to fix at a time of rising rates – especially given that the Bank of England is expected to increase the base rate next week. However, trying to find the perfect time to fix is notoriously difficult. A rate rise will be priced into savings deals right now, so changes are more likely to be driven by individual banks boosting their accounts to attract more cash, persuading their competitors to inch their rates up too. It means there’s no big bang, where overnight all the deals get better, so there’s no one day on which to cash in on higher rates. And while you’re hanging on for a better offer, your money will be sitting in a less rewarding easy access account, losing even more money after inflation.

If you have savings you won’t need for five years or longer, it’s worth considering whether any extra money could be working harder for you in investments. These will rise and fall in value over the short term, but over 5-10 years or more they stand a much better chance of beating inflation than cash savings.”