Figures released today showed the Consumer Price Index (CPI), which measures the rate at which goods and have services have risen, reached 5.4% in December.
This is the highest level CPI has reached since it was first measured in 1997. Based on the Office for National Statistics (ONS) ‘modelling’ if the CPI had existed before 1997, inflation would last have topped 5.4% in 1992.
High inflation has a direct impact on our finances – regardless of whether you are a homeowner – as it sets the price of the goods and services we are purchasing on a day-to-day basis.
If you are saving for a mortgage it will have an impact on the value of your savings. If you already have a mortgage, it could affect your rate as, when inflation rises, the Bank of England raises interest rates in order to soften the blow of inflation.
Sarah Coles, personal finance analyst, Hargreaves Lansdown, explained: “This piles the pressure on the Bank of England when it meets to discuss rates on 3 February. It hasn’t been this far off its inflation target of 2% since it first set it.
“And when you add rising inflation to falling unemployment and record low redundancies, it makes the argument for raising rates far stronger. It won’t want to panic borrowers, businesses or investors by raising rates too far or too fast, but it can’t afford for inflation to get out of control either.”
What can you do?
Whether you are saving for a mortgage or already a homeowner, there are several things you can do which may help you sail more steadily through the coming months.
One thing everyone can do is to watch their budget and be more careful around spending. See if there are any unnecessary purchases you can avoid. There are some tips here.
Sarah said: “With inflation running so high, we need to be careful that rising prices don’t push us into overspending. By far the best way to start is by drawing up a budget and working out the most sensible places to cut back.
“Cutting costs can be as simple as shopping around for a better deal on everything from media packages to groceries and insurance. However, if you’ve already taken the easy steps it might mean cutting out some of the luxuries you don’t really value.
“Checking for things lurking in your regular direct debits is a good place to start. It’s only if this doesn’t do the trick that you need to consider more difficult lifestyle changes to keep costs down.”
Mortgage switching
If you are on your lender’s standard variable rate (SVR) now is the ideal time to remortgage to a cheaper deal. There is more advice on this from mortgage adviser David Hollingworth of L&C Mortgages here.
Meanwhile, Amer Ali, associate solicitor in the Residential Conveyancing team at Blacks Solicitors, advised, if your fixed rate mortgage is coming to an end, you should speak to a mortgage adviser before the Bank of England hikes rates further.
Indeed, if you arrange a mortgage it will stay ‘live’ for six months so even if you are due to remortgage in May, you could consider locking into a fixed rate now.
Amer added: “For first time buyers waiting for the ‘cooling’ of the market and prices to drop, it might be worth reconsidering. Affordability might be affected if potential buyers wait too long and we see a further increase in interest rates.
“Sellers should consider offloading their property now whilst interest rates are low, and buying power remains in the market.”
Savings
If you are saving for a deposit for a home, inflation can have an impact. Indeed, as inflation and therefore the cost of living rises, the value of your savings is eroded.
So, unless the interest rate you are earning is above inflation, your savings won’t be keeping up with the price rises.
Sarah said this did not mean you should ditch your savings, but instead you should consider looking for an account which pays a better rate. Although you will struggle to find one which beats inflation, you may still be able to find a better deal.
You can find more information about the best savings products on the market at the moment and the benefits of switching here.
