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What's going on with UK inflation?

Understand the impact of high inflation on household finances, mortgage borrowers and long-term savings, so you can navigate the road ahead.

Published on 09 Oct 20238 minute read

Written by Alice Haine

High inflation is bad news for households desperate for some respite from runaway price rises. While the headline Consumer Prices Index inflation rate is now easing, core inflation – which strips out the more volatile items such as food and energy – has been slower to fall and presents a conundrum for policymakers and household finances.

Read on to understand more about:  

  • Stubborn inflation and the Bank of England (BoE) 
  • Rising cost of living in UK 
  • How inflation affects your cost of living 
  • Challenges for UK mortgage borrowers 
  • UK economy contracts: what this means for your finances 
  • The BoE base rate – will it remain on pause? 
  • Inflation insights to help you save 
  • How you can stay on track at Bestinvest 

UK’s headline inflation is easing but there is still some way to go 

Easing inflation sounds positive but consumers won’t see any improvement in their personal finances as prices are still very much on the rise. The bigger issue is core inflation, which has been slower to fall back posing a niggling problem for the Bank of England, which tracks this figure carefully to decide what to do with interest rates. 

Interest rate rises may now be on pause, but the spate of rate rises in the run-up to the latest decision could push some households to breaking point when their fixed-rate mortgages mature, and they must absorb significantly higher repayments. With mortgage costs increasingly taking up a larger share of consumers’ take-home pay, this could have dire consequences for the economy as people restrict their spending to ensure they can meet their household bills. 

Rising cost of living in the UK 

Britain may no longer be expected to be the poorest performer against its global peers. A recent upgrade to its post-pandemic economic performance by the Office of National Statistics, revealed the economy grew much faster than anticipated. 

Yet this country is still grappling with poor growth and an inflation problem, exacerbated by strong wage growth as employees demand bumper pay rises to help keep pace with rising prices. 

Household finances: how inflation affects your cost of living 

High inflation is not great news for households who have seen their finances hammered by the cost-of-living crisis since accelerating prices first reared their ugly head in late 2021.  

While consumers can take some comfort from easing food inflation, what people pay at the till will still feel alarmingly high. Separately, fuel prices are on the rise as oil prices edge up again and rents, another lingering source of inflation, are also increasing.

When you consider that inflation is a loss of purchasing power over time, with the money in your wallet today not going as far as it did 12 months ago, the best way to get ahead of rising household bills is to radically trim your expenditure. Do this effectively and it will help households tackle the next major challenge to their finances – unaffordable mortgage rates. 

The cost-of-living crisis puts the squeeze on mortgage deals

As the cost-of-living crisis gets overtaken by a cost-of-borrowing crisis, mortgages have taken the lead as the biggest personal finance concern of the moment. The era of cheap money has come to an abrupt and brutal end with borrowers now facing repayment levels that are unaffordable for some. 

Go deeper: read our detailed analysis about the mortgage crisis Mortgage Mayhem – what options do mortgage borrowers have now?

UK economy expands – what this means for household finances

Over the second quarter, the economy grew 0.2% though this might offer false hope for the future, with output contracting 0.5% in July.1 Even so, the UK economy has remained surprisingly resilient so far this year despite the multiple challenges:

  • interest rate hikes
  • stubbornly high inflation
  • widespread industrial action
  • deepening cost-of-borrowing crisis

While the country may still dodge a recession in 2023 – defined by two successive quarters of contraction – interest rates are at their highest level since the 2008 financial crisis though the hope is that they are now nearing or at the peak.  

Food and energy costs remain elevated, and inflation is only now easing from the persistently high level seen over the past year. With the tax burden at the highest level since the Second World War,2 households and businesses are struggling under the weight of cost pressures. 

Signs of trouble can be found in the softening labour market, with unemployment edging up, while company insolvencies may also rise putting more jobs at risk. Meanwhile, rents are soaring while the number of mortgage holders in arrears on their repayments rose in the second quarter of the year,3 as higher mortgage rates and persistent cost-of-living challenges added further pressure to household budgets already at breaking point. 

UK outlook remains uncertain

The BoE may be expecting the UK to avoid a recession this year, and potentially bypass a downturn altogether, but growth is likely to be limited. Unemployment is on track to rise over the next few years.

A stuttering economy is never good news for consumers as it creates uncertainty, particularly for households that have already had their finances battered by a pandemic and the subsequent cost-of-living crisis. The National Institute of Economic and Social Research warns that the UK is still at 60% risk of falling into recession next year, so the gloom is not over yet.

Rates may now be on hold, but they remain elevated – something that has a dampening effect on the housing market as home movers put relocation plans on pause and first-time buyers get priced out by affordability checks.

All this leaves the UK with a very uncertain outlook as falling consumer spending translates into weak demand for businesses with companies more likely to put hiring and expansion plans on hold as they reassess market conditions.

Inflation insights to help you save

High inflation is not great news if you’re keen to save money. For now, consumers should batten down the hatches: draw up a strict budget, keep a lid on spending and boost their savings to ensure their finances survive the storms ahead.

Inflation is on track to retreat over the course of the year, and savers should eventually see their money gain in value in real terms. Moving any funds languishing in a savings account with an ultra-low interest rate to a new account offering better returns will pay off in the long term if inflation continues its retreat.

Good to know: while a high-interest, easy-access savings account can be a great place to hold a rainy-day fund to cover six to 12 months of expenses, additional funds may require a more tax-efficient approach, such as a tax-free ISA

Maximise long-term savings – and annual allowances

With interest rates high and income tax thresholds either frozen or reduced, more people could find their existing cash savings at risk of breaching their personal savings allowance (£1,000 for basic-rate and £500 for higher-rate taxpayers).

Savers looking for a more tax-efficient option could consider using their £20,000 ISA allowance. Meanwhile, pension savers, who want the potential to beat inflation over the long term and receive generous tax relief in the process, could look to top up their retirement funds.  

With the pension lifetime allowance charge now scrapped – at least while the Conservatives are still in power – and the annual allowance raised by 50% to £60,000, savers have a window of opportunity to boost contributions to their workplace and personal pensions. This can be a highly beneficial strategy when inflation and the tax burden are both so high because pension saving offers generous tax relief. Remember that investments are higher risk than cash and the value can go down as well as up.

How Bestinvest can help your savings stay on track

If you have cash savings you’d like to put to work in a stocks and shares ISA or Self-Invested Personal Pension (SIPP), it’s a good idea to check the cash interest rate available. Some accounts leave your cash doing nothing between investments. At Bestinvest any cash you hold with us earns 4.45% Annual Equivalent Rate (AER) (cash rate as of March 2024 and subject to change). 

Monthly savings is an easy way to maintain the savings habit. You decide how much you want to save each month and the money is automatically deducted. Small amounts saved monthly can grow substantially over time through compounding – the snowballing effect of your returns generating more returns. It only takes a couple of minutes to set up and you’ll automatically enter into our monthly prize draw to win a cash prize of £250 (T&Cs apply). 

Try our smart planning tool, Grow my Money. Our simulator helps you compare how investing could help you reach your goals more quickly. As always please read the important information at the bottom of this page. If you’d like an expert’s perspective on your plans, you can book free coaching with our qualified financial planners whenever suits you.

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3 According to the Lloyds Bank UK Sector Tracker 

Important information

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. 

The value of an investment may go down as well as up and you may get back less than you originally invested.

Taxation depends on individual circumstances and tax rules may change.


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