What high inflation means for you and YOUR money - "Creates challenges for savers"

What high inflation means for you and YOUR money – “Creates challenges for savers”

Rishi Sunak says he is “ready” against inflation

Households across the country felt financial hardship in March as food and fuel prices pushed inflation to a seven percent high in three decades, ahead of the April rise in energy price caps. As the Bank of England warns that inflation could potentially reach 10 percent in months, the British are feeling the pressure.

what is inflation?

Inflation is an economic term that describes a steady rise in the prices of goods and services over a period of time.

The goods and services analyzed cover everything from food and transport to medical care and are weighted according to the areas that households consume the most.

The Consumer Price Index (CPI), an international measure that examines these inflation rates, jumped to seven per cent in the United Kingdom in March, from 6.2 per cent in February.

This increase is reportedly the highest CPI inflation rate since the beginning of the records in 1997, and modeled figures show that it is the highest general inflation rate since March 1992. (link)

This increase is alarmingly high, given that the inflation rate in the United Kingdom remained at only 0.4 per cent in February 2021.

However, if these rates are not high enough, the March inflation figures do not take into account the April rise in energy prices.

With the forecast that energy prices will jump another 24 percent in October, there are growing fears that rates could reach double digits by the end of the year.

READ MORE: Santander offers savings of 2.5% and you only need £ 1

What high inflation means for you and YOUR money – “Creates challenges for savers” (Image: GETTY)

What does high inflation mean to me?

Higher inflation means higher product prices and a decline in the purchasing power of money.

When general prices rise during inflation, but the value of money remains the same, it means that households can buy less goods for the same amount of money.

Steven Cameron, Aegon’s retirement director, told iNews: “The persistent period of low inflation has dulled people’s fear of inflation. We are now increasingly aware that high inflation could be around the corner, reducing the purchasing power of individuals and what they could buy over time for their savings.

“Keeping money in a bank usually brings interest, but if the interest rate is lower than inflation, money or purchasing power is actually lost.

“With interest rates at historic lows, just above zero, any inflation poses a challenge for savers.”

Graph of wage growth vs inflation

Rising inflation will affect prices and payments (Image: GETTY)

Given that CPI rates in the United Kingdom show a 7% inflation rate, this means that goods now cost seven percent more than last year.

Although moderate inflation can be seen as positive support for the economy, it can be very detrimental to finances for individual consumers.

Especially when the inflation rate in the United Kingdom is reportedly rising higher than average wages.

The National Statistics Office says wages rose 3.8 percent between November and January https://news.google.com/__i/rss/rd/articles/CBMigAFodHRwczovL3d3dy5leHByZXNzLmNvLnVrL2ZpbmFuY2UvcGVyc29uYWxmaW5hbmNlLzE2MTE1ODIvaW5mbGF0aW9uLXJhdGUtcmlzZS1tZWFucy1mb3ItbWUtbXktbW9uZXktYmFuay1vZi1lbmdsYW5kLWludGVyZXN0LWV2Z9IBAA?oc=5. However, when we take into account the inflation rate, the statistics in fact reflect that wages have fallen by one percent compared to the previous year.

It is also known that higher inflation creates business uncertainty. When rates rise, firms cannot be sure what their costs and prices are likely to be, leading to disincentives to invest; which has an impact on productivity.

The current economic environment is not very great for savers either. With interest rates in the UK remaining historically low and inflation so high, your savings are at risk of losing value.

inflation: Bank of England

Bank of England has an inflation target of 2% (Image: GETTY)

However, the Bank of England announced a one percent increase in interest rates to help deal with rising inflation in early May.

This meant that homeowners were hit by an immediate increase in monthly mortgage payments.

This increase in interest rates also affects other loans, such as your student loan.

Behind this is the idea that when loans become more expensive, consumers will have less money to spend, which means they will buy fewer things, which will lead to lower prices.

However, if inflation is caused by external factors, there is a limit to the extent to which higher interest rates can limit inflation.

Why is inflation rising so fast in the UK?

A number of factors are contributing to the increase in the cost of living, but the Russo-Ukrainian War and its impact on supply chains remain largely at the forefront.

Fuel costs are currently the biggest contributor to inflation, as prices broke records in February, when a number of countries, including the United Kingdom, began to gradually cut Russian fuel and gas supplies.

This caused an increase in wholesale gas prices, which led to an increase in providers’ prices.

Tax rates for air passengers and vehicle excise duties have also increased, as have postage costs, water bills in England and Wales, and regulated rail fares; all have a significant impact on inflation rates in the United Kingdom.

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