Inflation Just Rose Again. Here's What It Means For You – And Why You Have To Watch Your Finances

Mockup image for woman using electronic banking app on smartphone. Financial Wellbeing concept.Inflation climbed once again from 3.6% to 3.8% between June and July in a notable blow to the government, according to the latest data.The Office for National Statistics (ONS) announced on Wednesday that the usual measure for the UK’s inflation rate, the Consumer Price Index (CPI), was now at the highest level it has been for more than 18 months.Labour has repeatedly promised to tackle the cost of living crisis – so the rise in inflation is bad news for chancellor Rachel Reeves.Here’s why this is a big deal and what you need to know.What is inflation?Inflation is the rate at which prices increase and is one of the key indicators of how well the economy is performing.The 3.8% rate for July is nearly double the 2% target which the government tasks the Bank of England with hitting.Themain lever it uses to control inflation is interest rates – if inflation is too high, it makes it less likely that interest rates will be reduced.What is behind the increase?It was largely driven by price rises within the services industry, as inflation in the sector rose to 5%.Food inflation was also at 4.9%, pushed upwards by the rising cost of beef, chocolate, confectionery, instant coffee and fresh orange juice.The cost of eating out and non-alcoholic beverages also bumped up prices, as did air fares, which went up by a staggering 30.2%.For comparison, air fares rose by just 13.3% between June and July in 2024.Chief eocnomist Grant Fitzner said this hike was “likely due to the timing of this year’s school holidays” and the data collection date.This inflation rate rise marks the fourth consecutive time an annual rate has increased, although it is still a long way off the highs witnessed during the worst of the cost of living crisis in late 2022 (when inflation reached 11.1%).Reeves sought to play down the impact of the hike, saying in a statement: “We have taken the decision needed to stabilise the public finances, and we’re a long way from the double-digit inflation we saw under the previous government, but there’s more to do to ease the cost of living.”Shadow chancellor Mel Stride said it was “deeply worrying for families”, claiming: “Labour’s choice to tax jobs and ramp up borrow ing are pushing up costs and stoking inflation – making everyday essentials more expensive.”Meanwhile, Liberal Democrat Treasury spokesperson Daisy Cooper said it was “grim news”, adding that the chancellor needs “far bolder action, starting with the Liberal Democrat plan to halve energy bills by 2035.”What does this mean for interest rates?The Bank of England currently holds interest rates at 4% after choosing to reduce from 4.25% it in early August.But that decision was a divisive one.Its Monetary Policy Committee, which has seven members, was split over the idea of reducing the base rate, with several fearing that cutting interest would only accelerate inflation.It might mean the Bank of England is more reluctant to cut interest rates next time, too.Many will be asking the chancellor where the economic growth is.Why do you need to know this?Everyone is impacted by the economy, particularly when it comes to fluctuating inflation and interest rates. Here’s what you need to know.SavingsRising inflation reduces the value of any savings held in the bank, so it’s better when inflation is kept at 2%.But the base interest rate can also influence saving rates. If the Bank of England raises them, people may end up earning more on their savings as a result.And some banks can offer deals which are higher than the interest rate and inflation, which could help savers stop the value of their funds being eroded.MortgagesMost mortgages are not impacted directly by inflation, but by the Bank’s base rate of interest.For instance, tracker mortgages along with variable mortgages change directly when that base interest rate changes.Fixed mortgages instead focus on long-term predictions on what will happen with the base rate in the future.PensionsPensioners are really impacted by higher inflation because it means inflation reduces potential growth of any funds.Inflation also hits annuity rates – which gives people regular, guaranteed income after retirement for the rest of their life, as opposed to a pension pot which is finite.Declining interest rates ends up reducing the annual income available for someone to buy.Should we be worried about what happens next?The economy is already struggling to grow, despite Labour’s promises to put growth at the heart of its plan for the country.The job market is also uncertain, meaning the Bank of England is reluctant to commit to making any further interest rate cuts now.The Bank of England predicts that inflation will remain high throughout 2025, but reach a peak of 4% in September, while others fear it will get higher.Inflation is also not expected to come down to the target levels of 2% until 2027.As AJ Bell head of financial analysis Danni Hewson said, the weather plays a part in this, too.She said: “With UK farmers highlighting the expected impact of a dry summer on food production, many households will be worried that it’s going to take a considerable amount of time before these higher prices unwind.”Related...Cost Of Living Blow For Rachel Reeves As Inflation SoarsMPs To Get Above Inflation Pay Rise As Chancellor Prepares To Cut SpendingRichard Madeley Mocks Chancellor Rachel Reeves With New Job Title After Inflation Rise

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