Rising inflation: What does it mean for you?

Hot air balloon

Data from the Office of National Statistics (ONS) reveals that the Consumer Price Index (CPI) measure of inflation has been steadily rising since late 2015.

The latest increase in inflation to 2.3% in both February and March – the rate was 1.9% in January – has been put down largely to rising transport costs, especially fuel.

Unfortunately, many expect inflation to continue to rise over the year.

“Bank of England policymakers predict inflation will peak at 2.8% in the first half of next year, before a gradual fall back towards the 2% target,” says Ben Brettell, senior economist at Hargreaves Lansdown. “Many economists forecast a much higher peak, with respected think-tank NIESR saying inflation will reach 2.7%.

“But despite elevated inflation, those hoping for higher interest rates are likely to be in for a long wait. I expect the Bank of England to keep the bank rate at 0.25% for the remainder of the year.” So, what will that mean for your finances?

What does the rise mean for you?

Q. What is inflation?
Inflation is the rate at which the price of products and services rise. The main measures of inflation are the consumer prices index (CPI) and the retail prices index (RPI). They look at the price of thousands of products and services and monitor how their prices change each month. The main difference between the two is the RPI includes costs related to housing while the CPI does not.

Q. Why does it matter?
The Bank of England uses inflation to set interest rates. Traditionally, if it expects inflation to fall below 2% (the target figure) over the next year it will cut interest rates. If it expects inflation to be above the 2% target over the next year it is likely it will increase interest rates to try to subdue it.

Recently the Bank of England has left interest rates alone despite the fact inflation is ticking upwards. But, some expects believe that could change now inflation is so far above the 2% target.

“The odds on an interest rate rise are now close to even stevens,” says Laith Khalaf, senior analyst at Hargreaves Lansdown. “While market prices are saying the chance of a rate hike in 2017 is now approaching evens, it’s worth reflecting on the fact that that would only take rates back to 0.5%, hardly a dramatic improvement for anyone relying on cash for income.”

Q. Who is hardest hit by rising inflation?
Savers will be hit hard. With interest rates so low and inflation on the increase savings are losing their purchasing power. The products and services we buy are rising in value but the money used to buy them is not.

"Inflation is already a huge impact on savers’ interest, but as it is expected to rise further, times will be tough,” says Charlotte Nelson, finance expert at Moneyfacts.co.uk. “With 48% of the easy access market paying 0.25% or less, there are better deals out there. But savers will need to work extra hard at keeping on top of the best buys to maximise their interest.”


Q. What should you do?
Savings rates are pretty poor across the board but rates have been steadily rising since the new year. Last month Moneyfacts recorded 87 savings rate rises, with some as much as 0.5%. So, if you haven’t shopping around for a better rate on your savings now is the time to do it.



More about