What does inflation mean for you?

Inflation is at a three-year high, and things are set to get worse - what does it mean for you?


Inflation has hit 2.7% and has been steadily rising since it hit 2.3% in March. Now the experts are predicting it will climb closer to 3% as we go through the year. It means that despite the best efforts of the Bank of England, inflation is here to stay, so what does it mean for you?

See also: House prices dip as annual growth slows to weakest level since 2013

See also: Britain badly needs a pay rise, says TUC leader Frances O'Grady

See also: Next five years to see stagnant incomes and rising inequality - IFS

Rising inflation has largely been a result of a number of rising prices: notably air fares (with the Easter peak falling later than usual), clothes (affected by the falling value of the pound), electricity and car tax (or vehicle excise duty). As prices rise, it means that all of us face a squeeze on spending.

Notably this is coming at a time when wage growth is slowing, so we can expect the pain to become more acute as time goes on. Maike Currie, investment director for personal investing at Fidelity International, points out that "UK wage growth figures show total earnings including bonuses at 2.4% for the three months to March 2017. With inflation figures showing CPI at 2.7% and expected to rise even further, prices are likely to outpace wage growth, tightening the squeeze on UK households. As each month rolls by we'll be getting progressively poorer as the wages we are earning struggle to keep up with the prices of the goods and services we consume."

It's essential, therefore, for us to get on top of our household spending before the worst of the impact is felt. If we draw up a budget now, and look at ways of bringing down the cost of everything from utilities and insurance to grocery spending, then it will give us some wiggle room to adapt to the effects of inflation.

Inflation is bad news for savers too, as it means right now that no savings account is capable of keeping pace with inflation, so any money we hold in savings accounts will be losing money in real terms. It's essential that we do what we can to get as much interest as possible - the best easy access rate at the moment is just 1.1% (from Britannia, Yorkshire Building Society and RCI Bank). If you lock up your cash for a year, meanwhile, you can make 1.55% with Charter Savings Bank.

For some people, despite the fact that savings are losing them money, it remains the best place for their cash, because they cannot afford the risks associated with investment. For others, especially those putting aside money for five years or longer, this means it's well worth considering whether share-based investments would make sense for at least part of their money.

As inflation rises, the risk of rising interest rates recedes. David Hollingworth, mortgage expert at L&C Mortgages says: "The upside for those feeling the impact of higher inflation in their pocket, is that interest rates remain at rock bottom and mortgage rates are at or near the lowest on record. Borrowers should be making sure that they are taking advantage of these rates and keeping their mortgage costs to a minimum. All too many don't review their mortgage and our recent research found that not only were 36% sat on a high standard variable rate, but more than half have never even tried to remortgage."

"In a period of uncertainty for consumers, they can at least use the very competitive mortgage rates on offer to cut costs and also put some certainty into their biggest single monthly outlay by fixing their rate. That should at least help deal with the inevitable squeeze on disposable income that higher inflation brings."

Technically those with debts stand to gain too, because they will see the value of their debts fall as the value of money drops. Unfortunately, those who have borrowed to make ends meet are likely to be far too busy dealing with the squeeze on their income to notice.

There's plenty of bad news to go around, and according to Nick Parsons, Global Head of FX Strategy at NAB, things are unlikely to improve any time soon. He says: "We simply don't see that pick up in wage growth. And if anything with that CPI likely to turn out a bit higher than it is forecast then we see that squeeze on real incomes really dampening consumer behaviour in the U.K."

10 worst-paid jobs

10 worst-paid jobs