Inflation Rises to 30-Year High, What Does This Mean For You?

The latest Consumer Price Index (CPI) rose to 5.5%, the highest it has been recorded in the past three decades. So how will this impact your spending habits?

Savers will be disappointed not to see their interest increases keep up with inflation.

“Savers have been dealt another blow this month as inflation rises once more and is unbeatable with any standard savings account,” said Rachel Springall, Finance Expert at Moneyfacts.

At the time of writing, there is not one savings account which can outpace the current CPI. Furthermore, the latest Moneyfacts data shows that average savings accounts have been marginally increasing over the past six months, but not as fast as inflation.

The notice account increased interest rates on average by 0.06 percentage points, from 0.47% gross to 0.53% gross, in the past six months. In comparison the 5-year fixed rate account increased interest on average by 0.34 percentage points, from 1.17% gross to 1.51% gross, in the same period.

This means that the money savers have earned is becoming less valuable. In contrast, CPI stood at 3.1% in September 2021, which is 2.4% lower than the current rate.

“There are still savers out there waiting for the December 2021 base rate rise to be passed onto them, let alone the most recent uplift of 0.25% a couple of weeks ago. Those savers with the patience to wait may wish to reconsider their loyalty, particularly as they will not find a high-street bank featured in the top rate tables,” said Springall.

Those with a vested interest in an Individual Savings Account (ISA) will experience similar disappointment in the latest inflation rise.

Rates in the ISA market are continuing to stagnate, according to the latest Moneyfacts Treasury Report, which means you could wait for a better deal if interest rates rise in the coming weeks.

The rise will also be bad news for homeowners who still need to make payments on their property at a variable rate of interest.

High inflation is usually an indication of further interest rate hikes, and future rate hikes will increase the amount of money you will need to repay your lender. This is because the cost of borrowing will increase for banks and building societies and, as a result, this will affect your repayments too.

However, if you have opted for a fixed-rate mortgage, you will be protected from the effects of inflation. This can be an advantage of a fixed-rate mortgage, but consumers should always be wary of locking themselves into a rate of interest for too long. If interest and inflation were to fall, then fixed-rate consumers would not benefit from the trend.

Moneyfacts data also suggests that average 2-year and 5-year fixed mortgage rates have begun to rise over the past three months. The average 10-year fixed mortgage rates have been declining over the past six months.

According to the Office for National Statistics (ONS), clothing and footwear, housing and household services, and furniture and household goods all played a role in increasing inflation for January 2022.

“Clothing and footwear pushed inflation up this month and although there were still the traditional price drops, it was the smallest January fall since 1990, with fewer sales than last year,” said Grant Fitzer, Chief Economist at ONS. 

Meanwhile, Hargreaves Lansdown maintain that the rise in fuel prices have also played a role in this increase.

“For anyone being encouraged to return to the workplace, the extra cost of commuting by car could come as a horrible shock. If they have to buy a second-hand car to make the journey, that’s going to come as an even nastier surprise, because prices are up an incredible 28.7% in a year,” said Sarah Coles, senior personal finance analyst, Hargreaves Lansdown.

Despite the Bank of England setting an inflation target of 2%, it is expected to get worse before it gets better. Some economists, including Laith Khalaf, head of investment analysis at AJ Bell, has predicted CPI to rise as high as 7% in April.