Inflation is now at its highest level for 10 years and is set to carry on rising into next year before falling back towards the Bank of England’s 2% target.
Households are seeing significant rises in the cost of living starting to place serious strain on their budgets.
What is causing the situation, what can we expect over the next few months and what can households do to cope?
– Where did the price rises come from?
The annual rate of consumer price rises rose from 3.1% in September to 4.2% in October, largely due to rising energy and fuel costs paired with global supply chain disruptions, which has had a knock-on effect on the price of food and other furniture and household products.
Energy bills for 15 million households increased on October 1 by at least £139 to an average of £1,277 a year – a record high – under Ofgem’s latest price cap.
The increase was been driven by a rise of more than 50% in energy costs over the previous six months, with gas prices hitting a record high as inflation jumped amid the easing of pandemic restrictions.
Petrol prices were responsible for their share of inflation agony too. This time last year some areas of the UK faced restrictions on movement, so petrol prices were down at 113.2 pence per litre, but this October they hit 138.6 pence. It means filling up a 50-litre car now costs £12.70 more than this time last year.
– What else is going up in price?
Supply issues are also leading to shortages of goods including building materials and computer chips, further pushing up prices.
Used car prices – up 4.6% in October and 27% since April – continued to drive inflation higher too. A shortage of new cars has forced more people to consider second-hand vehicles. Meanwhile, supply has been held back by a shortage of part-exchanges on new cars, fewer one-year-old cars on the market after sluggish sales last year and people extending leases to cope with the shortage of new cars on the market.
– What are the next few months looking like?
The latest inflation data is a huge warning for households of serious pressure ahead for their budgets. With the Bank of England now warning about inflation exceeding 5% early next year, it is likely to remain an uncertain and uncomfortable period for many.
Many younger families in particular will have had little experience of dealing with such sharp price rises. With Christmas next month and tax hikes due in April, it could be a challenging time financially for a lot of them.
It also seems increasingly likely that the Bank of England will raise interest rates at the next opportunity, so households should also be prepared for mortgage costs and other loan repayments to go up.
– What can households do to try and balance the budget?
There’s no way around it – households need to start thinking very carefully about their spending across the board to counter those price rises they cannot control such as energy and fuel.
A quick look over the monthly bank statement should be a good start. Always shop around and use comparison sites for phone, broadband and insurance rather than just rolling over into the next year to keep costs at a minimum.
Consider whether subscriptions are still useful and providing a good deal – many people signed up to new services like Spotify, Netflix or Sky during lockdown and may no longer use them as much.
Think about shopping for own-brand grocery products and set a strict, affordable supermarket budget. Supermarket loyalty schemes can help with making savings.
Cashback sites, and their welcome offers, can be another way of making household budgets stretch further.
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