How 4% inflation will hit your family from food bills to savingsSeptember 24, 2021
INFLATION is set to top 4% for the first time in a decade – here's what it means for your finances and how to protect yourself
The rate of inflation is already at a three-year high but rising prices in supermarkets and at petrol pumps are just some of the things set to force it up further.
What is inflation?
Inflation is a measure of how much the prices of goods and services have changed over time.
The Government has an official basket of goods that it monitors which includes everything from food to TVs and haircuts to train tickets.
The rate of inflation is published each month by the Office for National Statistics (ONS) to indicate what has happened to prices over the past year.
The ONS collects around 180,000 prices of about 700 goods and services used across the country.
The Bank of England has a target to keep inflation at 2%. But inflation soared to 3.2% in August and this week the Bank warned it could reach 4% by the end of the year.
Why is rising inflation a problem?
Because it means your money doesn't go as far.
If a loaf of bread is £1 this year and inflation is at 4%, the same loaf will cost £1.04 next year.
That might not sound like a big deal, but if the same thing happens to everything in your weekly supermarket shop and all of your household bills, it can have a major impact.
At the same time, inflation erodes away the value of any savings you have.
So if you have £100 in the bank this year and inflation is 4%, the real spending power of that money is reduced to £96 next year.
It's a double whammy for households who are already grappling with spiralling energy bills and rising prices.
How can I protect my savings from inflation?
According to MoneySavingExpert, the best easy-access accounts pay just 0.65% currently and you’ll get 1.33% if you tie your money up for a year.
If you save £100, that means you’ll earn interest of just 65p and £1.33 respectively over a year.
Laura Suter, head of personal finance at AJ Bell, said: “Brits currently have £240 billion in accounts paying no interest at all, so at the very least these savers should get the best returns they can."
To beat inflation, you may need to think outside the box a bit.
Some banks are offering you cash if you switch your current account. Currently, RBS pays up to £150, Santander £130 and Nationwide £125.
JPMorgan Chase has launched a UK bank account that offers market-leading interest of 5% on round-ups and 1% cashback.
Premium Bonds can also be a good option for savers. For every £1 you put into them you get entered into a monthly draw where prizes range from £25 to £1 million.
The accounts are government-backed too, which means your money is protected.
How can I protect my household bills from inflation?
Household bills are a big worry for many people at the moment, particularly with the energy price cap set to rise at the end of this month.
Brits are being told not to try and shop around for a fixed energy tariff at the moment as prices are high and many suppliers are collapsing.
If you are currently on a fixed tariff make sure you put a note in your diary reminding you to shop around for a new deal a month before your existing one ends.
Make sure you take advantages of any allowances, too.
If you’re on a low income or receiving benefits, you could be eligible for the warm home discount, which gets you £140 off your bills during the winter months.
The cold weather payment is a £25 grant for people on certain benefits when the temperature drops below zero for seven days.
Comparisons sites can help you search or the likes of Look After my Bills or Switchcraft can find deals for you.
Shopping around is also vital for your mobile and broadband deals as well as any insurance products such as car or home insurance.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “If you’ve consolidated media and broadband into one, this is one of the areas where people have the most success negotiating with their provider.
“If you haven’t switched in a while give them a call, tell them you’re thinking of switching, and see what they can do for you.”
How can I protect my shopping bills from inflation?
Food prices are likely to go up, industry experts and government ministers have warned.
That could be made worse by food shortages and supply issues. A carbon dioxide crisis is also adding to shoppers' woes.
Shopping own brand products is one easy way to cut your grocery bill but shoppers should also make use of loyalty schemes like the Tesco Clubcard or Sainsbury's Nectar card.
If you’re worried about the cost of your shopping, you can also get help from your local food bank. Websites such as the Trussell Trust can help you locate a food bank near you.
Parents may also be able to get free school meals for their children.
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