Inflation hits 5.5% as energy bill and rising transport prices increase pressure on household finances
INFLATION jumped to 5.5% according to new data from the Office for National Statistics.
In December, it had already hit a 30-year high of 5.4%, but now rates have risen another 0.1 percentage point, putting even more pressure on households.
This means that inflation is now at its highest level since March 1992 – when it reached a whopping 7.1%.
But soaring rates are also hurting the pockets of Britons, as the ordinary person can expect to pay more for things like groceries and fuel, as well as used cars and rentals.
Analysts had previously predicted a rise in the inflation rate, and many expect it to rise further to 7% by April.
The ONS said rising energy prices were the biggest contributor to inflation, along with rising costs for food, alcohol, tobacco and clothing.
Rising prices have already driven up bills and created a cost of living crisis for millions of Britons.
Energy bills are set to rise by £693 for millions, in just weeks.
Indeed, the energy price cap, put in place to prevent households from being overcharged on their bills, will rise to £1,971 a year in the spring.
But that may not be the end of rising bills, as costs aren’t expected to rise further until later this year in October when the next price cap announcement is made – and another situation hasn’t not been excluded.
Transportation costs are also responsible for the rise in the inflation rate. This has resulted in a sharp rise in the cost of used vehicles – up 28.7% year-on-year – and gasoline prices hitting a new record high.
On top of that, there’s also soaring food prices and tax increases along the way.
Grant Fitzner, chief economist at the Office for National Statistics, said: “Inflation rose again in January, hitting a nearly 30-year high.
“Clothing and footwear pushed inflation higher this month and although there have always been traditional price cuts, this was the smallest January drop since 1990, with less than sales than last year.
“Rising costs for some household goods and rising rents have also pushed up inflation.”
The Bank of England raised interest rates earlier this month to 0.5% in the first consecutive increase since 2004.
Rate hikes are one way the Bank is trying to rein in inflation, and another is expected to follow at its next meeting in March.
How will this affect household finances?
Inflation has a double effect on households.
First, you will notice that the cost of basic necessities increases.
This means that at the supermarket your weekly purchases will be higher and your bills at home will also increase.
The average price increase is usually based on how much things cost today compared to a year ago.
So if the rate of inflation were to be 2%, that means something that cost £1 a year ago will cost £1.02 today – that might not sound like a lot, but it adds up quickly when everything increases.
The fact that wages failed to keep up with inflation last year is hurting households even more, so Britons have less in their pockets to shell out all the skyrocketing costs.
If your salary hasn’t kept up with the spike in rates, you might find that your household finances are tight and it’s harder to keep up with new prices.
This is because a higher inflation rate means your money isn’t going as far and you need to spend more accordingly.
The second effect of inflation is that it eats away at the value of your savings.
If inflation is higher than the interest you earn on your savings, you are effectively losing money every year.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “If you earn 0.01% on your savings with a typical easy access account and inflation averages 5% over the next 12 month, someone with £10,000 in savings would lose £499 of the purchasing power of their money.
“If you upgraded to the most competitive easy access account, paying 0.73%, you could retain an additional £72 of your purchasing power.”
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