Inflation, as measured by the Consumer Prices Index (CPI), has topped 3% for the first time since April 2012, putting the country’s inflation rate above all other EU countries. Bank of England governor, Mark Carney has also warned that inflation rates may continue to rise. He stated that he expects the figure to increase further over the coming months and cites the decline of sterling after the EU referendum as the leading cause of the situation.
How will the increase in the rate of inflation affect us, and could it be good news for some?
While an increase in the rate of inflation is typically bad news, there may be some positives to be found during the current peak in rates.
Pensions get a boost
Basic State Pension rates are controlled under the ‘triple lock’ agreement; year-on-year, pensions rise with whichever is the larger of:
- 2.5%
- inflation as measured by the CPI
- Average wage increases
As the 3% figure tops the other two, this will be used to increase the amount paid to those in retirement. From April 2018, those receiving the Basic State and New State pension will see a weekly increase of £4.78.
Households feel the pinch
As the cost of living continues to rise, families across the UK are struggling to make ends meet. Unfortunately, for many people, wage increases lag inflation. Therefore, household expenditure grows while income remains the same, putting pressure on budgets and forcing families to cut back on spending to focus on bills and necessities.
As the rate of inflation rises, there is an increased chance that interest rates will also be pushed up. While this may be great for those with enough money to benefit from it, it could spell trouble for variable rate mortgage holders, who will see higher payments as a result. This is worrying as data from the Financial Conduct Authority (FCA) shows that 4.1 million people are already in severe financial difficulty and one in six would not be able to cover a monthly rent or mortgage increase of £50.
Mixed feelings for savers
It is no secret that savers do not see significant returns, but the increasing cost of living means that the savings they do have will not stretch as far as planned. Meanwhile, the proposed increase in interest rates means that savers are being hit twice as hard by the current spike in the rate of inflation.
Second blow for small business owners
Business rate increases are calculated using the Retail Price Index (RPI), which is usually higher than the Consumer Price Index used to calculate inflation. In September, the RPI hit 3.9%, and the British Retail Consortium has confirmed that this will lead to an additional £273 million liability for small business owners in 2018. Up to 1.8 million small business owners will be hit by the rise, which follows a revaluation in April this year.
A mixed bag for benefit claimants
Traditionally, income from benefits increases each year, in line with the CPI rate of the previous September, which would have meant that payments would increase by 3% in April 2018. However, most working-age benefit amounts have been frozen until 2020. With a frozen income rate and such a sharp rise in the cost of living, this is problematic for those reliant on financial aid to survive.
Non-frozen allowances could see an increase in line with the 3% figure, including:
- Maternity pay
- Personal Independence Payments (PIP)
- Attendance Allowance
- ESA (support group)
Retirees
Retirees, who have used an Annuity to convert their pension into an income, usually buy a level Annuity, where the income payments remain static. That means, over the months and years, inflation erodes the buying power of their fixed income. As the rate of inflation picks up, so does the speed at which their fixed income is eroded.
The high inflation rate seen in September is a talking point for household across the UK, signalling good news for some, and bad news for others. The ins and outs of inflation, Price Indexes and interest rates can be confusing. To discuss your circumstances and the options facing you, contact us on 0800 612 8099.