What rising inflation rate means for your money as grocery prices climb – UK Times

UK inflation is on the rise again as the knock-on effect of the Iran war starts to hit UK households.

A steep rise in the annual rate of inflation for petrol, diesel and air fares helped push up the UK’s overall rate to 3.3 per cent in March.

The increases reflect the impact of the Iran war that began at the end of February, which drove up the price of crude oil during March and in turn pushed up the cost of filling up at the pumps.

Inflation is now at its highest level since December, with Britain expected to face further price rises in some areas over the coming months.

Here, The Independent take a look at what rising inflation means for your money.

Groceries

Chocolate, fish and meat were among the worst offenders as inflation for food and non-alcoholic drinks rose faster – at 3.7 per cent – than the overall headline inflation rate last month.

Ice cream recorded the biggest jump of any food produce, up from an annual rate of 1.7% in February to 6.3% last month.

James Walton, chief economist at the Institute of Grocery Distribution (IGD), said: “It is likely that much of this is down to cost pressures already in the supply chain, not the immediate impact of events in the Middle East.

“Over time, we expect cost pressures for food businesses to rise because food supply is energy intensive, with oil and gas involved at every stage in the process and this will be passed down the supply chain, eventually to food shoppers.”

Even if the ceasefire holds, it will not reverse costs already accrued, he warned. “The effects will unfold over months ahead. It will move at different rates in the various categories, with price changes for salads and fruit and vegetables likely to pass through the system more quickly.”

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The Food and Drink Federation (FDF) has previously warned it expects grocery inflation could hit as much as 10 per cent, with the IGD predict a slightly lower 8 per cent peak.

Clothes, airfares and more

Inflation doesn’t work evenly across the board, as shown in food prices surging faster than other areas.

Some sectors saw falling prices.

The average cost of women’s clothes, for exmaple, was up 0.9% year-on-year on in March, a smaller rise than the 3% recorded in February, while men’s clothes were up just 0.2%, lower than the increase of 1.0% the previous month.

Meanwhile, core inflation, which takes out more volatile elements such as energy and food prices, actually slowed slightly from 3.2 per cent in February to 3.1 per cent in March, even including a 10 per cent surge in airfares directly driven by higher oil costs.

“Core goods inflation remained subdued on the back of weaker clothing prices, furniture prices, car prices, and IT goods, with software prices seeing a huge drop in March,” said Sanjay Raja, chief UK economist at Deutsche Bank.

Some of those price drops seem to be driven by consumers being selective about their purchases, with shops reacting accordingly.

“Shoppers have turned cautious, and it seems retailers have had to discount to shift stock, with prices for clothing and footwear declining sharply month on month,” added Susannah Streeter, chief investment strategist at Wealth Club. “Clearly consumers are tightening their belts as another cost-of-living crisis arrives.”

Mortgages

Right now, most economists and analysts think the Bank of England will hold interest rates at 3.75 per cent when they meet at the end of April, with core inflation lower and unemployment dropping a little.

Rathbones’ senior analyst Adam Hoyes said the Monetary Policy Committee will feel “a bit more breathing room to wait and consider its response” – but the mortgage market moves swiftly and regularly, even outside these base rate votes.

However, the past few days have brought some minor relief.

Moneyfacts data shows an average 2-year fixed rate deal on Wednesday is 5.83 per cent, down from 5.87 per cent on Tuesday, and the average 5-year fix at 5.73 per cent down from 5.76 per cent. Small changes, but in the right direction for those hoping to renew or step onto the ladder.

Even so, those who have had to recently renew might be facing hefty repayment increases – but both Barclays and Skipton cut rates on mortgage deals on Tuesday in a further boost to the market.

“Swap rates have edged closer to 4 per cent and this has spurred a handful of the biggest lenders to start introducing cuts,” said Caitlyn Eastell, personal finance analyst at Moneyfactscompare.co.uk.

“Markets are still sensitive to sudden shifts, so it remains to be seen how long this will be the case. Homebuyers will need to evaluate their affordability because rates could stay higher for longer as the Bank of England tries to bring inflation back towards its target.”

Savings

Inflation matters most to your money when it comes to cash in the bank. Rising prices means the same pound buys less than it did before – and the way you combat that is to have an interest rate which is higher than the rate of inflation. Competition remains fierce among providers for your business so ensure your bank is offering a good rate – if not, move your money. Don’t keep large quantities in a current account paying no interest.

Aldermore have on Wednesday lifted interest rates slightly on a range of fixed income savings accounts, now giving 4.45% on an 18-month term deal, while Moneyfacts data shows the average 1-year fixed cash ISA rate on the market is now 4.13%.

The average easy access ISA rate is 2.76%, with non-ISA easy access accounts averaging just 2.47%. Rather than that showing that rates are on the way down, it signals that some providers are offering terrible rates below both the Bank of England base rate and indeed the rate of inflation.

That makes it vital that consumers make sure they either move their money or open a new savings account with a strong interest rate. The best on the market still include Trading 212 (ISA) and Chase (non-ISA) paying 4.5% or more.

“If inflation rises to 4% and someone’s savings are still earning 3%, they effectively lose £192 on an average savings pot,” underlined Kate Steere, personal finance expert at Finder. “That’s why it’s vital to always pick a savings rate that outpaces the headline inflation figure.

“Review your savings accounts – and don’t be afraid to be an account-hopper. When it comes to savings, loyalty rarely pays, as many providers drop your rate after 12 months. You need rates that actually beat inflation to grow your cash in real terms.”