Inflation rates: How will the shock rise affect your money?

Inflation unexpectedly crept up to 4 percent from 3.9 in December, despite many economists expecting a small drop to 3.8. Rises in tobacco and alcohol prices is the chief cause of the rise, according to the ONS.

The increase has bucked the trend of the past nine months, which has seen inflation consecutively falling or holding steady. Inflation hit 11.1 percent in October 2022, a 41-year high. The Bank of England’s inflation target is 2 percent.

Grant Fitzner, ONS chief economist, said: “The rate of inflation ticked up a little in December, with rises in tobacco prices due to recently-introduced duty increases.

“These were partially offset by falling food inflation, where prices still rose but at a much lower rate than this time last year.”

Core inflation, a rate that does not include volatile prices such as food and energy, rose to 5.2 per cent, up from 5.1 per cent.

How does the inflation increase affect my mortgage?

Mortgage rates typically follow the Bank of England’s base interest rate, and the Bank has increased its rates over the last two years in an attempt to curb rising prices. These high rates have lead to higher mortgage rates on the market. Currently the bank’ base rate has sat at 5.25% since September 2023.

In the first two weeks of 2024, lenders began to slash mortgage rates as it anticipated another drop in inflation. However, today’s unexpected rise may curb lender’s enthusiasm to keep cutting, meaning mortgage rates are more likely to remain at the current level. This means housing costs may remain high for the foreseeable future.

How does the inflation increase affect my pension?

If you take home a State Pension, inflation can affect how much it goes up or down every year. The Triple Lock rule ensures that your pension will rise in line with either inflation, average earnings or by 2.5 percent, depending on which is highest.

The State Pension rose by 10.1 percent in April 2023, in line with inflation. It is set to rise 8.5 percent in April this year, inline with average earnings. This means the new state pension will stand at £221.20 a week, up from £203.85.

Changes in inflation don’t directly affect private pensions but will change their relative value. If your savings grow at a slower rate than inflation, the relative spending power of your pension will decrease.

How does the inflation increase affect food prices?

Despite the increase in inflation, food prices continue to slowly fall to fall. While the headline inflation figure, Consumer Price Index (CPI), has gone up, this is not the only number that matters. Food price inflation has actually continued to decline, sitting at 8.0 percent in December 2023, from a high of 19.2 in March.

ONS chief Grant Fitzner points out that if not for rising tobacco and alcohol prices, inflation would have likely remained at 3.9 percent.

Rachelle Earwaker, senior economist at the Joseph Rowntree Foundation said: “As winter sets in, now is a bad time for progress on inflation to stall. Inflation remains at double the Bank of England’s target, and the price of essentials like fuel and food are much higher than they were, with food inflation falling but still running high at 8%.”

Are you affected by the inflation increase or have a story to share about the ongoing cost of living crisis? Get in touch via email: