Families feel pinch of rising inflation and lower rates

It's still cold outside '“ but that's nothing to the chill many families are feeling when it comes to their finances.

The rise in living costs could get steeper this year, as shoppers feel the effects of falls in the pound and stores pass on rising costs to consumers. Photograph: Getty Images/Wavebreak Media

The Office for National Statistics (ONS) has reported that inflation jumped to a two-and-a-half-year high in December 2016.

The Consumer Price Index (CPI) measure of inflation hit 1.6 per cent, marking the highest level since July 2014.

The increase was put down in part to rising air fares and food prices.

Meanwhile, a separate report has found households’ perceptions about price pressures in January reached their highest levels in three years.

The Markit Household Finance Index found that as a result of households feeling the pinch, their appetite for making major purchases was close to being the lowest since the start of 2015.

Commentators have predicted the rise in living costs could get steeper this year, as shoppers feel the effects of falls in the pound and stores pass on their own rising costs to consumers.

Rising living costs have prompted concerns that some families may be tipped over the edge.

Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline, says: “For households who are already in a precarious financial position, the risk is that this new squeeze could tip many into problem debt.

“Rising costs in food, fuel and clothing in particular will add to existing pressures more generally, and we can expect to see a higher level of arrears on everyday household bills, in particular.”

Savers may also find that their quest to find an account to even keep up with inflation gets tougher.

Analysis of the savings market by Moneyfacts.co.uk has found that only around one in every 15 deals currently available match or beat inflation.

The number of rates being chopped across the savings markets has been outweighing the number of rises for the last 15 months.

So what can savers do? One option might be to keep an eye on the rates on offer from “challenger” banks. Moneyfacts says some of these banks – such as RCI Bank, Post Office Money, Ikano Bank and Sainsbury’s Bank – have been making improvements to their rates recently.

In the low interest rate environment, any upward tweak in savings rates is likely to be small, although it could still make the difference between the real value of your savings pot growing or shrinking.

Some current accounts may also offer better rates than savings deals, and some also offer cash to switch.

Rachel Springall, a finance expert at Moneyfacts.co.uk, suggests: “Savers would be wise to consider dividing their investments across regular savers, current accounts, fixed rates and instant access for the best possible chance of decent interest rates, while maintaining some flexibility.”

This spring may also offer some hope to savers, however, with a new market-leading three-year bond set to be launched by NS&I, as well as the launch of the new Lifetime ISA to help those saving for their first home or their retirement.

Meanwhile, research from website Confused.com also shows how car insurance costs have accelerated in recent years, rising to £767 on average, compared with £499 in spring 2008.