Latest inflation rate at 7% - WOW

On the 13th of April, the BBC reported that the UK’s inflation rate had reached 7%. This is the highest rate of inflation for three decades, and it’s putting financial pressure on scores of households.

What is inflation?

Inflation is a way of measuring how products and services become more expensive over time. The Office for National Statistics (ONS) is responsible for tracking the UK’s inflation rate by comparing how specific items change in price every year.

The items of which prices are measured are known as “the basket of goods”. Items within the basket can change over time to reflect new habits and lifestyles.  The ONS releases monthly reports comparing the current price of goods compared to 12 months ago. These reports are called the Consumer Prices Index (CPI).

Despite its negative connotations, inflation isn’t always a bad thing. In fact, the Bank of England tries to keep inflation around 2% throughout the year by adjusting the base rate. Sometimes it exceeds this target, but it has rarely soared to the 7% mark.

Why has UK inflation hit 7%?

The inflation rate is influenced by a complex number of factors. There is no single reason why the Inflation rate has hit 7%, but some contributing factors are:

1. Increasing fuel prices
2. Increasing household bills
3. VAT increases for some businesses
4. Postage and air passenger duty increases
5. Train ticket hikes
6. The pandemic
7. Political events

Inflation rates elsewhere

The UK is not alone in battling rising costs of living. Italy, Germany, The Netherlands and Spain are all experiencing soaring inflation at 6.5%, 7.3%, 9.7% and 9.8%, respectively. The United States’ rate of inflation is at 8.5% at the time of writing, which is why the Federal Reserve System has suggested up to six base rate hikes later this year.  

What happens next?

Even though central banks are trying to decrease the inflation rate, the ONS has anticipated that it could reach 8.7% by the end of the year. This has been projected due to Russia’s illegal invasion of Ukraine.

How does this affect people with mortgages?

The Bank of England increases its base rate as a way to reduce the rate of inflation. It encourages people to save money rather than spend, which reduces demand and causes businesses to offer products and services for less.

However, increasing the base rate causes many homeowners to pay more in mortgage repayments. If your mortgage is subject to or influenced by the base rate, you should expect to pay more in the immediate future.

The only people shielded from higher mortgage repayments are those that are on long-term fixed-rate deals. If you’re not on a fixed-rate mortgage or your fixed period is expiring in the next six months, you may want to speak with a mortgage adviser for advice. Switching mortgage deals today could save you money now and in the future.

May 2022