What is inflation and how does it affect you?

Recently the news has been filled with worrying topics such as the cost-of-living crisis and rising energy bills. There are so many terms being used to describe the stressful financial circumstances that UK households are facing, and it can be a bit overwhelming to understand the individual impact on you.

It has been announced that inflation is the highest that it has been in 40 years, having risen to 10.1% but what does this mean in terms of your personal financial situation?


We have summarised some of the key information, which will hopefully help you to make financial decisions that result in the best outcomes for you and your family.


What is inflation?

Inflation is the term used to describe how much the price of goods (such as food) has changed over time. The inflation rate is calculated monthly by the Office of National Statistics (ONS) which analyses the prices of around 700 items to provide the Consumer Prices Index.

If inflation is 10% it means that items are 10% higher than they were at the same time a year ago. As an example, if a loaf of bread cost £1 a year ago and inflation is 10%, it now costs £1.10. The higher inflation is, the more money households need to spend on their regular shopping items.


Why has inflation risen?

The main reason that prices have risen so much is due to increased energy prices. Covid restrictions resulted in increased demand for oil and gas, and the war in Ukraine has also impacted energy prices, as gas and oil from Russia become less available.

A typical grocery shop will now cost 10% more than it did a year ago, however, salaries are not increasing at the rate to keep up with inflation. Historically, people were able to overcome increased prices because salaries increased enough each year to cover the higher costs.

Despite wages in the UK growing by around 6% from May to August 2022, when an inflation adjustment is included, regular pay has actually shrunk by 2.9%. There are also many workers who have not seen any pay rises or very minimal pay rises, and it is these workers that are most negatively affected by inflation.


How will inflation affect me?

The cost of many of the items you regularly buy will have increased and if your income has not increased at the same rate as inflation, your money will not go as far each month. Mortgage rates have also increased due to inflation and many landlords will increase rent to account for inflation, so living in your home could also cost you more each month.

The Bank of England has a target of 2% for inflation and they have been increasing the Bank Rate to try and reduce inflation. This means that there are higher interest rates on mortgages and other loans, while savings accounts also have a higher interest rate, so savers will benefit from the current high interest rates.


People who have a mortgage that is coming to the end of a fixed term could be facing a significantly higher interest rate on their next mortgage deal and anyone who needs to take out a loan or credit card will also be looking at higher interest rates than a year ago.

The Bank of England is anticipating that inflation will start to fall next year but this is not guaranteed. Financial experts could never have foreseen the impact the Covid pandemic, or the Russia-Ukraine war would have on the economic market.


Tips for money management

While inflation remains high it is more important than ever to carefully manage money and look for ways to reduce expenditure.

Taking out high interest loans may seem like the only short-term solution, but it will have a long-term impact on your finances, as you could end up paying back significantly more than you borrow.

Shopping around for your items can help you to reduce the cost of groceries and eliminating unnecessary costs for a few months can also help you to manage your finances more effectively. Even small changes to your spending habits can have a big impact over the year and being more savvy about reducing food waste and heating usage can save you money.


At CLCU we are not just a savings and loans provider, we are a community.

We are here to help provide financial support and advice, so if you are worried get in touch for support and advice.