Published On: Sat, May 21st, 2022

Inflation rate rise – what high inflation means for you and YOUR money | Personal Finance | Finance

Bank of England ‘asleep at the wheel’ on inflation says Carver

Households across the country felt the financial squeeze in March as food and fuel prices pushed  rates to a three-decade high of seven percent. With April’s energy price cap increase of 54 percent included; pushing up an estimated £700 a year, inflation rates have now jumped to nine percent. With the forecasting rates to reach double figures by the end of the year, Britons are feeling the pressure.

What is inflation?

Inflation is the economic term to describe the sustained increase in prices for goods and services within a specific period of time.

The goods and services analysed include everything from food and transportation to medical care, and are weighted towards the areas most consumed by households.

The Consumer Price Index (CPI), which is the international measure that examines these inflation rates, jumped to a staggering nine percent in the UK in April, up from seven percent in March.

The increase is reported to be the highest rate of CPI inflation in 40 years.

This increase is worryingly high, considering inflation rates in the UK rested at just 0.4 percent in February 2021.

However, with energy prices predicted to jump a further 24 percent in October, fears are mounting that rates could reach double digits by the end of the year.

READ MORE: Nationwide is offering 2% interest rate and £100 switching deal

Inflation rise: Bank of england, hand holding money

What high inflation means for you and YOUR money – ‘Raises challenges for savers’ (Image: GETTY)

What do high inflation rates mean for me?

Higher inflation rates mean higher product prices and a fall in the purchasing power of money.

When general prices rise during inflation but the value of money stays the same, it means households can buy fewer goods for the same monetary sum.

Steven Cameron, pensions director at Aegon, told iNews: “A sustained period of low inflation has blunted people’s fear of inflation. There’s now a growing realisation that high inflation could be around the corner, which reduces individual’s purchasing power and what they could buy with their savings over time.

“Keeping money in the bank typically earns interest, but if the interest rate is lower than inflation, money or purchasing power is effectively being lost.

“With interest rates at historic lows, just scraping above zero, any amount of inflation raises challenges for savers.”

Pay growth vs inflation chart

Rising inflation will affect prices and pay (Image: GETTY)

As CPI rates report a nine percent inflation rate in the UK, this indicates goods now cost nine percent more than they did last year.

Although slight inflation rates can be seen as a positive boost for the economy, to individual consumers, it can be quite damaging to finances.

Especially when UK inflation rates are reportedly rising higher than average wages.

The Office for National Statistics shows wages rose by 3.8 percent between November and January. However, when considering inflation rates, statistics actually reflect pay to have fallen by one percent compared to a year ago.

Higher inflation rates are also known to stir business uncertainty. When rates rise, firms cannot be sure of what their costs and prices are likely to be, leading to deterrence in investment; posing an impact on productivity.

The current economic landscape isn’t too great for savers either. With interest rates in the UK remaining historically low and inflation running so high, it means your savings are at risk of losing value.

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inflation: Bank of England

The Bank of England has an inflation target of 2% (Image: GETTY)

However, the Bank of England announced an increase in interest rates to one percent to help tackle the rise in inflation in early May.

This meant homeowners were hit with an immediate increase in monthly mortgage repayments.

This increase in interest rates also has an effect on other loans, such as your student loan.

The idea behind this is that when borrowing becomes more expensive, consumers will have less money to spend, which means they’ll buy fewer things – leading to a drop in prices.

However, when inflation is caused by external factors, there is a limit to how much increased interest rates can curb inflation.

Why are UK inflation rates rising so rapidly?

A number of factors are contributing to the spiralling cost of living, but the Russia-Ukraine war and its impact on supply chains remain largely at the forefront.

Fuel costs are currently the biggest contributor to inflation rates, as prices broke records in February when a number of countries, including the UK, began phasing out Russian fuel and gas supplies.

This caused wholesale gas prices to rise, causing providers to up their prices.

Air passenger duty and vehicle excise duty rates have also seen an increase, as have the cost of postage, water bills in England and Wales, as well as regulated rail fares; all bearing substantial impact on UK inflation rates.

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