Falling UK Inflation: What Are the Implications for Pension Savings?

Executive summary:

  • While the fall in inflation is welcome, the impact of higher interest rates on mortgage borrowers still has some way to play out.
  • The reduction in inflation will help DB members that are drawing on their pension.
  • Pension trustees should consider their investment strategy and support members with their retirement planning.

On Wednesday, Nov. 15, UK Prime Minister Rishi Sunak celebrated achieving one of his five pledges—to halve inflation by the end of the year.

This commitment was made in January 2023 when inflation stood in excess of 10%, and it was fulfilled last week when the registered UK consumer price inflation for October fell to 4.6%.

Yet, for many consumers, mortgage borrowers, and renters, it feels like a hollow victory—UK inflation is still among the highest among major economies. The drop in inflation last month was largely attributable to the huge increase in household energy bills last October now passing out of the calculations.

Wage growth has not compensated households for the surge in the price level and mortgage rates have risen fourfold since late 2021. The Bank of England was clear to stress that there is still a lot of work to do to control inflation as the core rate (stripping out the more volatile food and energy components) is at an elevated level of 5.7%. Annual producer price inflation, which often leads developments in consumer prices, is in negative terrain and raises the hope that the recent fall could carry on for a few months.

Chart: UK inflation developments

UK inflation developments