Inflation: how to cope with the big squeeze

Making the sums add up will get harder as wages and benefits become worth less. Photograph: Hemera/Getty

The consumer prices index (CPI) measure of inflation reached a 22-month high of 1 per cent in September, and while it remains low by historical standards, it’s now tipped to hit 3 per cent during 2017 as the effect of the EU referendum result feeds through to living costs. The retail prices index (RPI) measure of inflation, which includes mortgage interest payments, rose to 3 per cent.

Hannah Maundrell, of money.co.uk, said: “There’s no escaping the fact that the luxury of low inflation is now over, prices have started to rise and the pound in your pocket will start to buy you less.

“Your household budget will be stretched as the cost of fuel, energy and anything that’s made overseas creeps up. The cost of your supermarket shop should be protected for now but even this is likely to cost more next year.”

Borrowing costs could increase too, if further inflation encourages the Bank of England to hike interest rates. Fears of higher inflation have already undermined consumer confidence, according to the latest monthly household finance index from Markit.

“For the first time since the vote to leave the EU, UK households saw a noticeable downturn in current finances during October,” said Philip Leake, economist at IHS Markit. “Inflation appeared to be a key factor behind the financial strain.”

The impact of higher inflation will be felt in various ways, depending on household circumstances. Here are some of the implications, and some tips on mitigating them.

Cash savings

The impact on cash accounts could be brutal, leaving savers struggling to find any deals that keep pace with inflation.

Fewer than half of the 644 savings accounts currently available can match or beat inflation, Moneyfacts figures show. There have been more than 550 rate cuts since the start of August and many of the best deals are still disappearing.

Rachel Springall, finance expert at Moneyfacts.co.uk, said: “Inflation rising to a 22-month high will now play on the minds of many consumers, as there will be very few accounts paying 1 per cent or more. Some may pin their hopes on the Autumn Statement to provide some good news, but so far no initiatives have been divulged that could benefit struggling savers.”

Savers have been turning instead to the best in-credit rates on current accounts, but they are now being slashed too. Bank of Scotland, Halifax, Lloyds, TSB and Santander are all cutting the rates paid to current account customers over the coming months.

These continue to pay higher returns than normal savings accounts, however. So too do the regular savings accounts tied to current accounts, which are typically fixed for a year and require minimum monthly deposits. Several still pay 3 per cent or above, including products from Saffron Building Society, Kent Reliance, The Nottingham and Santander.

Another option is the peer-to-peer accounts from the likes of RateSetter, Zopa and Funding Circle, which allow savers to earn interest of more than 4 per cent by lending to people or businesses wanting to borrow.

Tax credits and benefits

Higher inflation means the government’s freeze on most working age benefits and tax credits will now cost £360 a year, according to the Institute for Fiscal Studies (IFS).

The freeze means benefits are not being uprated in line with inflation until at least 2020. The IFS has estimated that the freeze represents a cut in payments of 4 per cent, leaving more than 11 million families worse off by an average of £260. However, the latest inflation forecasts from the International Monetary Fund suggest the freeze will now amount to a 6 per cent cut, an average annual loss of £360.

The IFS estimate underlines that the poorest will pay the heaviest price for the weakening pound, said David Hilferty, policy executive at Money Advice Scotland.

“More and more people are already presenting to money advisers with debts that are not the result of reckless spending, but instead are directly linked to the cost of living.

“For families on low incomes, the prospect of rising inflation alongside stagnating wages and the falling real value of benefits threatens to stretch household budgets to breaking point.”

If you are struggling to cope, don’t hesitate to get help. Free debt advice is available from organisations including: Step Change (0800 138 1111, www.stepchange.org), Citizens Advice Scotland (www.cas.org.uk or your local bureau), the Money Advice Service (0300 500 5000, www.moneyadviceservice.org.uk) and National Debtline (0808 808 4000, www.nationaldebtline.co.uk).

Energy bills

Wholesale gas prices have begun to rise in recent months and the impact is being compounded by weak sterling, as the UK now imports most of its energy supply. Co-op energy bills are going up by between 3 and 6 per cent this month and newcomer GB Energy announced last week that it was increasing its standard dual fuel variable tariffs.

Tying into a fixed rate energy tariff is a good way to protect against rising prices, but those already on one should make sure they switch when their existing tariff expires. Millions of households could be rolled on to their supplier’s expensive standard variable tariff over the coming weeks, with 14 fixed dual tariffs ending on 31 October, according to Gocompare.com.

ScottishPower customers on its Online Fixed Price Energy October 2016 tariff face the biggest increase if they move on to the firm’s standard deal. EDF, Npower, Co-op and First Utility also have fixed tariffs maturing this month.

Ben Wilson, energy spokesperson at Gocompare.com, said: “With autumn well under way, many families will be firing up the thermostat over the next few weeks. Research found that Sunday, 16 October, was when the majority of people turned on their central heating, so now is the ideal time to shop around and ensure that you’re not paying over the odds for your energy.”