How inflation affects you

What price rises mean for your money

In supermarkets, on forecourts, across day-to-day essentials and in your gas and electricity bills – it’s hard to escape higher prices. Inflation, or the rising cost of living, has stretched budgets for many and piled pressure on household finances.

If you’re worried about how to stay on top of your money, we’re here to help.

Our series of guides, real-life stories, articles, tips and more could help you to make the most of your money, keep careful control of spending and find support if you’re in difficulty. Inflation doesn’t just squeeze your income, though. It can affect your mortgage bills, savings and the cost of borrowing.

With inflation at its highest level for years, here’s a quick Q&A to help you understand its impact on you and your money.

What does inflation mean?

Put simply, it’s the rate at which prices rise for goods and services over time. In other words, it’s how much extra you might have to pay to fill up your car, heat your home or buy groceries in the supermarket. Say the price of your favourite cereal is £1.50 but it rises to £1.65 over a year. This 15p increase – a 10% rise - means the inflation rate for your breakfast staple is 10%.

A visual representation of a cup of tea in 2022 costing £1.50 and the same cup of tea in 2023 now costing £1.65, showing an inflation rate of 10%.

How is it worked out nationally?

To create an inflation rate for the UK, a typical ‘shopping basket of goods’ is put together by the Office for National Statistics.

This long pricelist of around 700 everyday items aims to reflect the nation’s shopping habits and tastes. It includes the cost of daily goods and services such as a loaf of bread, milk, eggs, a pizza delivered to your home, and a bottle of wine.

Your bigger financial commitments also feature, such as rent, council tax, any mortgage interest, gas/electricity bills, and what it costs to buy a new or second-hand car. (To reflect changing taste, the basket is updated when our preferences change.)

Every month, the ONS reveals how much the prices of the goods in the basket have risen over the past 12 months. This gives the key inflation figure known as the Consumer Prices Index (CPI). In July 2022, it hit a 40-year high of 10.1%.

A visual representation of the same typical household shopping basket of goods over time, showing an increase in the cost of the basket.

Why are the price rises so high?

War in Ukraine, huge demand for goods and services here in the UK and post-Covid problems shipping in supplies from overseas have all triggered shortages which push up prices.

In particular, the conflict has had a major impact on the global supply of oil, gas and food. These critical shortages have led to steep rises in gas and electricity bills as well high prices at the pump for your petrol and diesel. Supermarket grocery bills have also gone up as food producers pass on higher costs of wheat, vegetable oils and fertilisers.

Higher interest rates have also added to the pressure, as greater monthly mortgage costs make it more expensive for some home owners.

How does inflation affect my money?

When your everyday spending costs more, it will hit your budget and leave you with less income overall. But inflation can exert a huge influence on other parts of your personal finances too: 

• Mortgage interest rates

The Bank of England base rate aims to control inflation – its target is 2% - and keep the UK economy on an even keel. When inflation rises, the base rate can go up to try and bring it down.

How? In a nutshell, higher interest rates encourage people to save (and spend less) and make borrowing more expensive (again, deterring consumers from buying). In turn, this helps slow price rises. When interest rates rise, if you’re a homeowner with a variable-rate mortgage, you could pay more each month if your bank passes on the rate rise.

At the same time, if you’re looking for a new home loan, you’ll likely pay more for your mortgage as the deals on offer tend to reflect the higher base rate.

• Loan and credit cards

As with mortgage deals, if the Bank of England base rate rises, the cost of taking out a personal loan or credit card could also go up. There isn’t always the same direct link to a movement in Bank of England base rate, though. This is because many other factors such as your credit score are included in the rates on offer.

• Savings

In response to inflation, a higher Bank of England base rate tends to lead to greater interest rates for your savings. However, when the inflation rate is much greater than the one you earn in interest, you’re effectively losing out because your savings can’t keep up.

For example, say you have £1,000 earning 2% in a savings account. If inflation is at 5%, it means the goods and services that you’d have spent your savings on now cost a lot more – so your savings have lost what’s called their ‘purchasing power’.


Can I protect my finances against inflation?

Making the most of your everyday money can help you to offset the impact of high inflation. From better budgeting to cutting back and keeping your spending in check, there are practical steps you can take to try and get on top of your finances. Paying down expensive debt could help you curb costs too.

Investing in the stock market is also one way to try and earn returns that beat inflation. However, it’s much more risky than putting your money in a savings account. A stock market investment is instead best considered for the long term - at least five years - and as part of a long-term overall strategy for your personal finances.


Will inflation keep rising or go back down?

The answer varies depending on who you ask. Any number of economists, analysts, forecasters or specialists will have an opinion but nobody can be certain it’s the right one.

What most can agree on, though, is that while inflation can rise quickly, it can take a very long time to come back down.

person using calculator

The rising cost of living

With prices on the rise, we’re here to help you stay on top of your money, budget better and find ways to cut back and save.

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