UK inflation: How to survive rising household bills

Inflation has surpassed the 2% target for the third month in a row. It’s time to sit up and pay attention

High-street lows: while everyday bills are going up, incomes aren’t keeping pace (Getty)

Blame the oil industry, Brussels, rising air fares. The Consumer Prices Index has hit 2.7 per cent – its highest level in almost four years.

Higher than most economists’ forecasts, the Bank of England expects the rate the cost of living goes up by to peak at the end of the year at just under 3 per cent.

The problem is that while our everyday bills are going up, our incomes aren’t keeping pace. Wage growth is lagging behind at 2.4 per cent and GDP growth is down at 0.3 per cent.

Now, everyone from campaigning politicians to staid analysts is talking about one thing – the big squeeze on our money.

With consumer spending already losing power as a result, what, if anything, should you do now?

Here’s what the experts say:

Savings

If you’re holding out for higher interest rates, you’ll probably be waiting for a while. It’s not good news, again, for the nation’s savers as just one member of the Bank of England’s Monetary Policy Committee voted for higher rates at last week’s meeting to decide whether or not to shift from the historic low of 0.25 per cent.

“With CPI inflation at 2.7 per cent, it’ll be tougher than ever for those who need and want to keep some of their money in cash, as there are now only a small handful of accounts paying rates in excess of inflation, such as high-interest current accounts from Nationwide, Tesco, TSB and Bank of Scotland – and the maximum interest bearing balances on these are comparatively low,” says Anna Bowes, director at SavingsChampion.co.uk.

However, the key to mitigating the effect of inflation by as much as possible is to choose the right accounts with the best rates.

The good news is that there has been a rise in the number of new lenders known as ‘challenger banks’.

“These providers are keen to make a name for themselves as well as raise funds from savers and therefore have been driving some competition back into the market – although unfortunately still not enough to beat inflation,” she adds.

“Savers may need to be prepared to try out banks that they’ve not heard of before. But as long as these unfamiliar providers are regulated and are part of the UK Financial Services Compensation Scheme, or European equivalent, their funds are just as secure as those more established names.”

Mortgages

If there was ever a time to make the most of some of the most competitive mortgage rates we’ve seen in years now, many suggest, is it.

“The upside for those feeling the impact of higher inflation in their pocket is that interest rates remain at rock bottom and mortgage rates are at or near the lowest on record,” says David Hollingworth, associate director at mortgage broker L&C.

“Borrowers should be making sure that they are taking advantage of these rates and keeping their mortgage costs to a minimum. All too many don’t review their mortgage and our recent research found that not only were 36 per cent sat on a high standard variable rate, but more than half have never even tried to remortgage.”

In a period of uncertainty for consumers, they can at least use the very competitive mortgage rates on offer to cut costs and also put some certainty into their biggest single monthly outlay by fixing their rate.

That, Hollingworth suggests, should at least help deal with the inevitable squeeze on disposable income that higher inflation brings.

Investments

Coupled with warnings of falling wages in the year ahead the economy’s main driver of growth, consumer spending, is likely to be hit in the coming months. That, says James Klempster, head of investment management at Momentum UK, makes a clear aim all the more important when it comes to managing investments.

“Although it’s unlikely that inflation will rise at the same pace for the rest of 2017, the reality is that it won’t be going away any time soon,” he says. “That’s why planning ahead and investing to mitigate the effects of inflation is always a smart idea.

“We believe it is imperative to invest in products with the sole purpose of generating returns in excess of inflation. That way you prevent it from eating away at your cash savings and instead benefit from real returns.”

Pensions

The problem is, most of us don’t realise the true cost of inflation, especially those who retired before 2010 and took out a fixed annuity, warns Elliott Silk, commercial director at investment and wealth management firm Sanlam.

“As bills rise across the board, retirees on a fixed income begin to feel the inflation pinch. As we enter this period of increased inflation, one of the ways people can consider avoiding inflation eating away at their hard earned cash is to seek out alternative investment vehicles."

“With bond yields unattractive, retired savers may be tempted to increase equity exposure, but equity valuations look top-y in a number of major markets,” adds Nick Dixon, investment director at Aegon. “Staying diversified, while favouring low volatility equity dividends over capital returns, may be a more prudent approach.”