Rising inflation: How it's hurting your finances

The plunging value of the pound due to fears over Brexit, combined with rising food and fuel prices means our money is losing value faster than it has done for years. Inflation is once again a real concern.

The consumer prices index (CPI) rate of inflation made a shock rise to 2.3% in February where it also remained in March (the latest figures available at the time of writing), higher than the Bank of England’s 2.05% forecast. Many expected rising food and fuel prices to cause an increase in the rate of inflation, but the surprise came in the news that in February the ‘core’ inflation rate – one that excludes food and fuel – rose to 2%.

“Inflation for cultural and recreational goods, especially personal computers, rose sharply,” says Ruth Gregory of macroeconomic research company, Capital Economics. This is “perhaps an early sign that the effects of sterling’s fall are feeding through more quickly than had been anticipated”.

The worry now is that this is just the beginning of an upward trend; while it's far too early to know if inflation will hit the dizzying heights of the 1970s, when it reached 25% in 1975 and averaged 13% a year across the decade, it does seem as though the only way is up.

So what does this all mean for you?

Household bills

Everyday expenses will be the areas where we feel the impact of inflation most.

Fuel prices hit an 18-month high at the start of the year, they’ve fallen back slightly since then but you are still paying more to fill up than you were a year ago. The average price for a litre of petrol is currently £1.20, compared to £1.03 a year ago.

Rail fares are also on the up, rising by 2.3% on average in January. Likewise, the Big Six energy firms are currently announcing price rises averaging 8%.

So what can you do?

To cut motoring costs, go to petrolprices.com to find the cheapest petrol pumps in your area. For cheaper energy bills, pay by direct debit and check if another provider can offer you a better deal.

Use our free energy tool to check if you can save by switching. And to combat rising food costs, buy own-brand items, and compare prices according to price per weight rather than the labelled price.


Savings rates

While prices are moving steadily up, savings rates are going nowhere. Low interest rates also magnify the impact of rising prices, as our money will buy even less over time. For example, if you put £50,000 in a savings account five years ago that paid 1% interest it would have grown to £52,551 now. That's £2,551 worth of interest, right?

Unfortunately, due to inflation, you would need £54,984, to buy the same things as you could have bought with £50,000 five years ago. So, in real terms you money’s spending power has shrunk by £2,433.

So, if you want your savings to keep pace with inflation you need a bank account paying at least 2.3% interest. Ideally, an Isa so your returns aren’t affected by tax, but with the new personal savings allowance you may be better off with a standard savings account.

Unfortunately, there is only one savings account (other than regular savers, which require you to have a current account with the bank) offering a rate that beats inflation – Ikano Bank’s five-year bond paying 2.35%.

Read our round-ups of the best cash ISA and best savings rates

Mortgage repayments

To fix or not to fix? That's the question on many mortgage holders' lips. For the past eight years homeowners have benefitted from record low mortgage rates. But mortgage rates are starting to slowly rise now, meaning it could be time to opt for a fix and lock in a low rate before they disappear.

There are still some incredibly good long-term fixes available which could allow you to secure a low fixed rate for five or even 10 years. Meaning you could avoid any interest rate turbulence over the next two years as Britain journeys out of the EU.


Gilts (government bonds), and to a lesser degree corporate bonds, look particularly vulnerable, because they pay a fixed rate of income that buys less as inflation eats into it – although there are inflation-linked bonds that try to counter this. As far as investing in UK equities is concerned, companies that produce real things that people will buy regardless of price, such as big food retailers, tobacco companies, utilities companies and pharmaceuticals, look the safest bests.

"These are all defensive industries which are best placed to perform in difficult economic times," says Patrick Connolly, spokesperson for financial planning firm Chase De Vere.
Ultimately, you're not going to be able to beat inflation with your savings, but over the longer term there's potential for greater total returns that could outpace inflation.

Pension pots

Inflation hits pensions hardest when they are used to buy an annuity – or a regular income – in retirement. The vast majority of annuity holders buy level (unchanging) annuities, rather than escalating or index-linked annuities that increase each year. This is because a level annuity promises a greater yearly income to start with.

However, that amount will never change; by contrast, index-linked annuities rise in line with inflation each year, while escalating annuities go up annually by a set amount.


The good news is, since the arrival of pension freedoms two years ago, you no longer have to buy an annuity. With inflation rising you may want to keep your retirement savings invested for longer so your money can (hopefully) continue to grow.

In order to make sure you have a regular income to cover your essential expenditure you could choose to use only part of your retirement savings to buy an index-linked annuity. That way you get the best of both worlds – peace of mind that you will always be able to pay your bills combined with a pension pot that is still growing.

How is inflation calculated?

Traditionally, there have been two measures of inflation: the consumer prices index (CPI) is the official measure, while the retail prices index (RPI) tends to be slightly higher – it's 3.2% at the moment – because it includes housing costs. Both indices look at the costs of a basket of approximately 700 goods and services that typify consumer spending habits; an average figure is then calculated by getting around 180,000 price quotations each month.

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