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Inflation hits a 30-year high of 5.4%: what it means for you

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Inflation hits a 30-year high of 5.4%: what it means for you

Sarah Coles, personal finance analyst, Hargreaves Lansdown

19 January 2022

Inflation hits a 30-year high of 5.4%: what it means for you

  • CPI inflation is up again to 5.4% in December.
  • This is the highest CPI inflation has been since it was first measured in 1997. The ONS has modelled historic levels, and if it had been measured for longer, it would last have topped this level 30 years ago – in 1992.
  • What this means for interest rates.
  • Where price rises come from.
  • What you can do about inflation.
  • What this means for savers.

The ONS has released inflation figures for December: Consumer price inflation, UK: December 2021 – Office for National Statistics

Sarah Coles, personal finance analyst, Hargreaves Lansdown:

“Inflation is the horrible 90s trend we didn’t want to see again, but it’s back. CPI inflation has hit 5.4% for the first time since it was first measured 25 years ago. If CPI had been around a bit longer, we wouldn’t have seen it this high for 30 years. And this isn’t the last of it: the Bank of England expects inflation to peak around 6% in April, but unless there’s significant intervention in the energy market, there’s every chance it could go as high as 7%.

This piles the pressure on the Bank of England when it meets to discuss rates on 3 February. It hasn’t been this far off its inflation target of 2% since it first set it. And when you add rising inflation to falling unemployment and record low redundancies, it makes the argument for raising rates far stronger. It won’t want to panic borrowers, businesses or investors by raising rates too far or too fast, but it can’t afford for inflation to get out of control either.

Where price rises come from

A big chunk of price rises come from trends we’ve seen for months now, including the ever-increasing price of petrol. More of us are now having to reconsider just how far we drive and how often, as the cost of filling up soars. This time last year petrol prices were 114.1 pence per litre, but this December they hit 145.8 pence. It means filling up a 55 litre car now costs £17.44 more than this time last year. Overall the cost of transport is up 11.9% in a year.

Most of us are now living in fear of energy price hikes too. The price cap rose in October, which fed into these figures. Since then, it has been keeping a lid on rises for millions of people – although some are still paying more as they come off fixed tariffs and roll onto the price cap, or have been moved from a failed cheap provider to a more expensive tariff elsewhere.

The power of the price cap can be seen from the fact that despite massive increases in wholesale energy costs through the last three months of the year, energy inflation remained static. The price of electricity is up 18.8% in a year, and gas is up 28.8%. It’s no wonder so many people are worried about what happens when the price cap is changed in April and prices are expected to rise as much as 50%.

Food and non-alcoholic drink prices made a much bigger contribution to inflation than we’re used to – with prices rising 5.4%. Within our trolleys there were some eye-watering rises, including margarine up 27.3% in a year, oils and fats 13.1%, sauces 11.6%, lamb 8.5%, low fat milk 8.2% and crisps 9%. When these essentials rise in price, it makes it far more difficult for us to cut costs. Once we’ve traded down brands or to a discounter, it’s a far more dramatic change to have to stop buying milk and margarine to cut costs.

Clothes prices bucked the usual December trend and actually got more expensive during the month. We typically see them drop between November and December in the pre-Christmas sales, as shops try to clear the shelves of partywear. However, this year prices rose, as stores tried to capitalise on the return of Christmas parties and celebrations. Clothes prices are up 4.5% in a year, and children’s clothes are up 5.5%.

Then there are a host of things that we don’t buy regularly, but if we need to buy them, we’re in for a nasty shock. Second-hand cars are up 28.6% in a year. Demand has been outstripping supply, leading to some eye-watering rises. Someone who bought a second-hand car a year ago is likely to find it’s worth more now than when they bought it .

Home improvements, including maintenance and new furniture continued to rocket in price too. as a result of a home improvement boom from more people spending more time at home, and ongoing supply problems. Materials for home maintenance are now 13.9% more expensive than a year ago, while home furnishings are up 12.5%.

What you can do about inflation

With inflation running so high, we need to be careful that rising prices don’t push us into overspending. By far the best way to start is by drawing up a budget and working out the most sensible places to cut back. Cutting costs can be as simple as shopping around for a better deal on everything from media packages to groceries and insurance. However, if you’ve already taken the easy steps it might mean cutting out some of the luxuries you don’t really value. Checking for things lurking in your regular direct debits is a good place to start. It’s only if this doesn’t do the trick that you need to consider more difficult lifestyle changes to keep costs down.

What this means for savers

Higher inflation makes it even more difficult for your savings to keep pace with price rises, but this doesn’t make savings any less important, and it doesn’t mean you should have your emergency savings anywhere other than an easy access account. This is about the security of having something to fall back, so you need to have the money to hand when disaster strikes.

It doesn’t mean you should settle for rock bottom rates on offer from the high street banks though, because instead of putting up with a derisory 0.01%, you can get up to 0.72% on easy access savings.

Once you have 3-6 months’ worth of essential expenses in this account, you need to look elsewhere for the rest of your savings. For money you will need during the next five years, you can consider fixing for the most appropriate period.

When inflation is on the rise like this, it always sparks talk of rate rises. The Bank of England could decide to hike rates again within the next three weeks to keep inflation under control, and even if it doesn’t, it’s widely expected to do so several times during 2022.

You might be tempted to put off fixing your rate in the hope that savings rates will rise after the next Bank of England announcement. However, we can’t guarantee when rates will rise, and even if they do, we can’t be confident banks will pass on those rises. The banks have plenty of cheap money from the government, so they’re in no rush to raise rates to attract more from savers. It’s why none of the high street giants have budged on easy access rates in the aftermath of the rate hike in December.

Even if rates do rise, how will you know when they’ve reached the top? You could just end up trapped in the waiting game, worrying that you’ll pick the wrong moment and rates will rise again. A sensible alternative might be to consider a shorter fix. At the moment you can get 0.75% over six months, or 1.36% over a year.

For money you don’t need for 5-10 years or more, you can consider stock market investments. The value of your investments will rise and fall in the short term, but over longer periods you should be able to ride this out and your investments stand a much better chance of outstripping inflation than they would in savings accounts.”

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