Rising inflation: What does it mean for you?

18 January 2011

UK inflation rose to 3.7% in December, up from 3.3% the previous month, official figures show.

The data from the Office of National Statistics (ONS) reveals the figure is 0.8% above the 12-month average of just 2.9%.

According to the ONS, the biggest drivers of inflation were fuel, utility bills, air travel and food costs.

Experts are predicting the Bank of England will now be further encouraged to hike interest rates in order to curb inflation.

"Pressure is building for an interest rate rise, and the sharp rise in the CPI figure announced today will hopefully now make those in power sit up and take notice," says Andrew Hagger, a spokesperson for financial comparison website moneynet.co.uk.

Will interest rates rise in 2011?

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 consumer priced index (CPI) and the retail prices index (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. Why does it matter?

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.

Q. Who is hardest hit by the rise?

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.

"With CPI now at 3.7% a basic-rate taxpayer needs to earn 4.625% gross on their savings to maintain their spending power - apart from locking their cash away for five years in a fixed rate bond (Coventry BS 4.75%) this simply isn't achievable," says Hagger. "A higher-rate taxpayer needs a gross savings rate of 6.17%"

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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