The consumer prices index (CPI) measure of inflation rose to 5.2% in September, up from 4.5% in August.
Meanwhile, the retail prices index (RPI), which includes council tax and mortgage payments, has gone up from 5.2% to 5.6%.
Both rates are more than double the Bank of England's target for inflation of 2%.
The Office for National Statistics (ONS) says soaring energy prices is the most significant contributor to the higher inflation rates.
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Housing and household costs have gone up by 3.5% month-on-month, as a result of higher energy bills, rent increases and the cost of maintenance.
Problems for UK households
Kevin Mountford, head of banking at moneysupermarket.com, says high inflation is continuing to cause problems for UK households.
"Energy hikes, the soaring price of petrol and the rising cost of everyday basics such as food, have hit households hard. Many workers also have to deal with pay freezes, meaning their incomes are actually dropping in real terms, it is no surprise many feel like their finances are either at, or rapidly approaching, breaking point," he says.
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Inflation is still having an effect on savings and 93% of savers are worried about its effects on their savings, according to the Post Office.
Basic-rate taxpayers need an account paying at least 6.5% to beat inflation and gain benefit in real terms from their savings, increasing to 8.67% for higher-rate taxpayers.
"Inflation continues to whittle away any hope of a decent return on the nation's savings," says Sylvia Waycot, spokesperson for Moneyfacts.
"Today's news offers absolutely no hope for anyone relying on savings interest to help pay for rising food and fuel bills," she adds.
There are now only five savings accounts that beat inflation for basic-rate taxpayers – and two of these are structured products.
Pressure on Bank of England
The official measure of inflation - CPI - is now at an all-time high and the Bank of England has missed its 2% target for the 22nd consecutive month.
Despite calls for interest rates to rise to combat inflation, the Bank's Monetary Policy Committee kept the base rate at 0.5% for a record 31st consecutive month in October.
Thomas Paterson, chief economist at Gold Made Simple, calls this "an epic failure" and says the Bank of England's credibility is "hanging by a thread".
"Whatever external forces the Bank of England blames for the overshoot, the bottom line is that for all of 2011 it has created more than double the inflation the government has asked it to," Paterson adds.
"And what has been its response to missing its government-mandated inflation target for nearly two years? Its response has been to print more money – and not just a small amount but an expansion of the UK's already bloated balance sheet by almost a third."
Paul Mumford, senior fund manager at Cavendish Asset Management, says investors could benefit from inflation as it carries "a silver lining for equities".
"With inflation now running at over 5%, eroding the capital value of bonds, equities are rendered yet more attractive compared to fixed income assets, which at current are struggling to provide investors with decent income. By contrast, equity dividends are steadily increasing," he adds.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
RPI
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
Structured products
Structured products offer returns based on the performance of underlying investments. Many products are linked to a stockmarket index such as the FTSE 100 or a “basket” of shares. There are generally two types of product, one offers income, the other growth and investors have to commit their capital for the prescribed term, usually three or five years. The investment is not guaranteed and if the index or basket of shares does not perform as expected over the term the investor might not get back all their capital.
Inflation
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Fund manager
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
CPI
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
Equities
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Base rate
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
