Inflation hit 2.3% last month, which is the highest it’s been for three and a half years. The increase is more than the government’s target of 2% and it means households could soon start noticing their money really doesn’t go as far as it used to.
Food and fuel are the two things that have influenced the rise in inflation. Fuel increases are partly due to the rise in global oil prices, but a weak pound is also to blame.
The cost of certain foods is also increasing – again, some of this can be put down to the falling pound which makes importing food expensive. But there have also been genuine shortages of certain things – mainly vegetables because of bad growing conditions. In one example, the price of a humble lettuce increased by 67%.
The rise is predicted to give British households a sharp shock, as inflation has remained at near zero levels for the last year. But inflation doesn’t just affect the things we buy, it also has a role in determining our Bank of England base rate, which in turn impacts things like current acounts, savings accounts, mortgage and loan repayments.
If inflation keeps increasing, then the Bank of England may consider increasing base rate to try and control it. If the base rate does increase then so too can interest rates on certain products meaning that the amount you pay for a mortgage, loan or credit card could also increase. Of course, on the other hand an increase in base rate can be good news for savers as the interest rate they earn earn on their deposits can also increase – every cloud and all that.
So, what’s a person to do? Well, the best thing is to reassess your finances and make your money work for you. If you’ve got a nest egg tucked away somewhere, then make sure you’re getting the best interest rates you can on savings and cash ISAs
If you’ve got credit cards or a loan, then consider switching or consolidating your debts so that they’re still manageable if rates were to rise. And if you have a mortgage but your fixed rate is up for renewal, then think about whether remortgaging elsewhere could give you a better deal. Don’t forget that if you’re on a tracker or a standard variable rate, this could rise too so make sure you check you budget for any increased payments and consider moving onto a fixed rate if the certainty of a set amount a month would be better
Whatever you do, don’t panic – the 2.3% is only a reflection of one month’s inflation rate and as none of us has a crystal ball, we can’t say what’ll happen over the next year. It’s always good practice to keep on top of your money mountain (or penny pile) so don’t just wait for cautionary headlines – make sure you always comparethemarket.com for the great financial products out there.