The rate of inflation in the UK has risen sharply, from 1.5% in April to 2.1% in May, reaching the highest level in almost 2 years. It takes inflation past the Bank of England's (BoE) 2% target for the first time since the pandemic began.
In this article, we explain what is happening with UK inflation, what it means for you, and what action you may need to take.
What is happening with the rate of inflation?
Data released by the Office for National Statistics (ONS) has revealed that inflation reached 2.1% in May 2021, up from 1.5% in April 2021, surpassing the BoE's 2% target for the first time in almost 2 years.
Behind the higher inflation figure is a hike in fuel prices, which were almost 18% higher in May than a year earlier, while clothing and footwear prices rose by 2.1% as people sought to buy new outfits to wear to their post-lockdown plans.
The data was collated on or around the 11th May 2021 - almost a week before indoor dining and entertainment venues reopened on the 17th - which could mean that we see another increase in next month's inflation figures once the further easing of lockdown restrictions is taken into account.
The BoE has said that it expects inflation to hit 2.5% by the end of this year, before settling back to its 2% target as the impact of post-lockdown energy price rises fades along with other cost pressures, such as bottlenecks in supply chains.
Rising inflation, particularly seeing as it has now surpassed the BoE's 2% target, means that an interest rate hike could be on the horizon. The BoE is in a bit of a tricky position, however, as although it may need to drive inflation back down before it spirals, it will not want to stifle the UK economy's post-pandemic recovery arc.
Despite inflation increasing 0.6% in just 1 month, analysts generally expect inflation to level out at around 2%, and perhaps hit 2.5% at its peak. That being said, if the recent inflation figures prove not to be transitory over the coming months, the BoE may be forced to intervene to keep it under control, which would involve raising interest rates above the historic low of 0.1% that they have stayed at since the start of the pandemic. This would see knock-on effects on interest rates across several aspects of personal finance, from mortgage rates to savings returns to retirement income.
Higher interest rates would be good news for savers, who would benefit from better returns on their holdings, but borrowers could see the price of mortgage repayments or personal loans go up.
What do you need to do about the rise in inflation?
If you have a mortgage:
If you believe interest rates are likely to rise over the short to medium term, it may be worth switching to a longer-term fixed-rate mortgage before rates start to go up. Don't make the mistake of waiting for the interest-rate rise to happen before remortgaging, as you will almost certainly have missed out on the best deals.
If, like a significant proportion of mortgage borrowers, you are on your lender's standard variable rate(SVR), you face increases in your monthly repayments if interest rates do start to rise. Depending on your circumstances, you should be able to get a more competitive rate than the SVR, which is typically much higher than the initial rate on a new deal.
Check out our mortgage best buy table to see the best deals on the market right now. We also explore the advantages and disadvantages of longer-term fixed rate mortgages in our article "Which are the best long-term fixed rate mortgages - and should you get one?"
If you have a savings account:
If interest rates do rise, it will be a welcome relief for savers, who have been stuck with historically low interest rates for an extended period. However, it is worth noting there is usually a lag between interest rates rising and this filtering through to savings products.
While you wait, it may be worth shopping around for a better deal with our best-buy savings tables. Now may also be a good time to implement a cash ladder, which allows you to enjoy the boost of locking money away without the risk of missing out if interest rates do start to go up. You could also try out a savings platform, or even take out a Lifetime ISA, where the government tops of your savings by 25% when you save up to £4,000 per year to buy a house or for retirement.
Keep an eye on Damien’s interest-rate forecast
As always, it's a good idea to keep an eye on Damien’s interest rate forecast for up-to-date analysis and predictions to help you manage your finances.