Inflation passes 4% mark

Inflation hit 4% in January, double the government's 2% target.

The increase has been partly blamed on rising fuel prices and the increase in VAT in January from 17.5% to 20%.

The jump in consumer prices index (CPI) inflation from 3.7% in December has prompted more calls for the Bank of England to increase interest rates.

Read: Will interest rates rise in 2011?

The Bank of England uses inflation to set interest rates. If it expects inflation to fall below 2% (the target figure) over the next year it will cut interest rates. If it expects inflation to be above the 2% target over the next year it is likely it will increase interest rates to try to subdue it.

Retail prices index (RPI) inflation - which includes mortgage interest payments - also rose from 4.8% to 5.1%.

What does the rise mean for you?

Q. What is inflation?

Inflation is the rate at which the price of products and services rise. The main measures of inflation are the CPI and the RPI. They look at the price of thousands of products and services and monitor how their prices change each month. The main difference between the two is the RPI includes costs related to housing (in other words mortgage payments) while the CPI does not.

Q. Who is hardest hit by the rise?

At the moment, savers will be hit hard. With interest rates so low and inflation on the increase savings are losing their purchasing power. The products and services we buy are rising in value but the money used to buy them is not. However, anyone with a tracker or on a lender's SVR should start thinking about fixing before interest rates rise.

Q. What should you do?

Savings rates are pretty poor across the board but if you've not tried finding a new home for your savings since the credit crunch hit it's worth checking around to see what is on offer. Remember though, interest rates are likely to start rising at some point this year so locking your savings into a fixed bond now may not be the best move.

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