What does inflation mean for consumers?

22o January 2024

Last week, the Office for National Statistics (ONS) caught many economists and consumers by surprise when it announced that the rate of inflation in the UK rose to 4% in December from 3.9% in November.

With the Government achieving its goal of halving inflation in 2023 (cutting it to under 5%), many thought that inflation would continue to fall, leading to more financial stability. However, the news that prices have risen, no matter how slight, coupled with the fact that real wages compared to prices aren’t predicted to return to 2021 levels until 2027, means that it's as important as ever for you to understand what inflation means for your finances.

Real-term impact of inflation

When discussing inflation, it’s vital to understand its role in everyday life and financial decisions. Minor inflation changes are expected, but when costs rise and remain higher than your pay check for a significant period, we get into the cost-of-living crisis we find ourselves in.

Every day, staples like food, electricity, clothes, or rent may rise in line with inflation, resulting in your bills increasing and your wages or savings not stretching as far as they used to. In the worst-case scenarios, you may be unable to afford all the goods or services you used to.

The inflation rate only increased by 0.1% this month, so you might wonder why it’s attracting so much attention. Fundamentally, it could have a knock-on effect on how the Bank of England (BoE) responds when it comes to setting the base rate of interest when it meets next month.

A higher base rate means higher interest rates. For borrowers with mortgages and credit cards, it could mean higher debt repayments. The BoE raises the base rate in the hope that people will think twice about borrowing and spending, leading to prices softening and, in theory, the inflation rate falling.

It’s not all doom and gloom, however. The level of inflation is nowhere near the record level of 11.1% we saw in October 2022, and over 900 savings accounts are now paying interest at rates that are higher than inflation. For those who can save, it’s critical to make the most of the current landscape. Despite inflation rising, there is still the possibility that the Bank of England will reduce the base rate in 2024, with savings rates falling alongside it.

How do you find value as a saver?

If you’re able to save, you must be thorough in your search for the most effective savings providers. High street banks were found to be slow in passing on higher interest rates to savers, with consumer group Which? calling some available rates “measly”. One possibility is to look further afield, considering alternatives such as challenger banks, many of which remain at the top of the charts regarding best savings offers.

At Chetwood Financial, we’re committed to providing higher interest rates to savers and, in doing so, support you in looking to reverse the damage that high inflation has had on their finances. For example, our easy-to-use online savings accounts at SmartSave provide one of the most competitive offers on the market, all protected under the Financial Services Compensation Scheme.

After the difficulties of the past couple of years, it’s time to grab opportunities and make your money work for you. Do your research, make smart choices, and your finances may bloom.