Inflation higher than expected at 3% – what it means for your money

The Office for National Statistics has announced that the Consumer Price Index (CPI) rose to 3.0% in the year to January 2025. Economists had predicted that inflation would rise, having fallen as low as 2.5% in December 2024; however, the rate has exceeded expectations. Consumers will be keen to understand whether this is likely to influence the Bank of England's plans to make further cuts to the base rate of interest later this year, as well as the impact it will have on the cost of goods and services in the coming months.

What has caused inflation to increase?

Inflation, measured by CPI, had fallen marginally from 2.6% in November to 2.5% in the year to December 2024 but it was widely expected that it would increase in January this year. Transport, food and education costs rose by the largest margins but other areas of cost such as clothing, furniture and recreation, also contributed to the higher inflation figures for January.

January usually sees a dip in airfares, but this year saw a lower-than-expected drop in prices. This could likely be attributed to higher fuel costs and lower passenger demand compared with January 2024 as the post-pandemic desire to travel eases. The expected rise in private school fees as the addition of VAT came into force in January meant that overall education costs rose by 2.4%; however, this was a one-time change and so is likely to have little ongoing effect.

The most widely felt increase is usually experienced through a rise in the cost of food, which rose to 3.3% over the year to January - it rose by 2.0% in December. A rise in the cost of meat caused the most significant inflationary effect on food prices, followed by increased costs for bread, cereals, confectionery, milk, cheese, and eggs. The ONS reported that increased prices for sliced cooked ham, lamb and half chocolate-coated biscuits were among items that pushed food inflation upwards but the figure was also a reflection of the fact that prices fell in the same period last year.

With energy and water prices set to rise in April, as well as rail fares increasing next month, inflation is predicted to increase to around 3.7% by the summer. The forthcoming increase in minimum wages and employer NI contributions from April could also result in businesses passing these extra costs onto consumers. But for the time being, some of the pain may be balanced by wage rises - employees' total earnings grew 6.0% in the period from October to December 2024.

What will the increase in inflation mean for interest rates?

The Monetary Policy Committee (MPC) at the Bank of England (BoE) set out its vision for more cuts to the base rate over the course of the coming year when it voted to cut the base rate from 4.75% to 4.50% earlier this month. However, it cautioned that future decisions to cut the rate would be 'gradual and careful' - highlighting that much would depend on the effects of budgetary decisions made by the treasury that are yet to work their way through the economy. There are also global factors to consider, such as decisions coming out of the US and the outcomes of conflicts between Russia and Ukraine, as well as in the Middle East. While domestic factors are likely to have been factored into the Bank's commentary, global factors are less predictable and could still disrupt the vision.

At its last meeting, the MPC voted to cut the base rate by 0.25% by a majority of 7 to 2. The two outliers voted for a more significant cut, which would have reduced the base rate by 0.5%. This could indicate that even if tempered, committee members may choose smaller cuts, rather than none. Although small, if recent growth in the economy is built on, the BoE may also feel less pressure to pause base rate cuts in order to control inflation.

We explain more in our article, “Will interest rates continue to fall in 2025 & how low will they go?”.

How will the rise in inflation affect mortgages and savings?

Although a rise in inflation is unlikely to be welcome news for borrowers, it is important to note that an increase was expected, and despite this, lenders have continued to cut interest rates over the last two weeks. So far we have seen a flurry of competition between lenders, some even bringing back sub 4% interest rate mortgage deals, rates we have not seen since autumn last year. However, the repricing was largely limited to 60% loan-to-value mortgages and hasn't hit high higher loan-to-value deals in quite the same way, indicating caution on the part of lenders when it comes to those with smaller deposits or less equity in their homes.

You can find the best mortgage deals based on your specific requirements using our mortgage rate comparison tool or by checking our regularly updated article, “Best mortgage rates in the UK”. Choosing which mortgage deal to apply for can be challenging as you'll need to decide whether to fix and how long for or they may be other options that are better suited to your needs. If this is the case, a mortgage expert can offer guidance to help you reach the best decision. Habito* is a free online mortgage broker service that searches over 90 lenders' mortgage deals as well as those that may only be available through an intermediary. Alternatively, you can search for a mortgage broker in your area using the online professional services directory, Vouchedfor*, which lists mortgage professionals based on customer reviews and specialist services.

While many will have seen variable savings rates reducing in line with the latest cut to the base rate, higher inflation is usually an indication of fewer cuts ahead, however, this may not be the case if the Bank of England persists in cutting the base rate over the coming months. Savers can still secure rates higher than 5% with some ISAs, notice accounts and regular saver accounts. We regularly update the best savings rates in our article, "Best Savings Accounts in the UK". Fixed rate bonds may also give some savers the option to fix rates - we list the best rates for these in our article, "Best Fixed Rate Bonds in the UK - 2025".

Things you can do if you are struggling with bills and mortgage payments

If you are struggling to pay bills or your mortgage payment, you should talk to your provider, whether this is your energy supplier or your mortgage lender. By talking through your situation, you may be able to get access to a better rate or method of payment to alleviate the difficulty you face. You should also ensure that you are claiming any benefits that you qualify for, and you can do this easily by using the online benefits calculator tool entitledto. There are a wide range of organisations that can point you towards extra help in these circumstances, and we have listed these below.

• turn2us
• Trussel Trust
• Moneyhelper
• Citizens Advice

 

 

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