Inflation on the Rise Again: What it Means for Your Money
While inflation has held steady this week, economists are largely anticipating an upward trend throughout the coming summer months. The current Consumer Price Index (CPI) measure of inflation sits at 3 per cent. It was previously on a trajectory to reach the Bank of England’s 2 per cent target this year, but this outlook has shifted. Now, forecasts suggest inflation could climb, potentially reaching 4 per cent by the end of 2026. A significant contributing factor to this change is the ongoing conflict in the Middle East, which has pushed oil prices above $100 a barrel, creating ripple effects across other commodity prices.
The Shifting Inflation Landscape
Last March, the CPI, the most widely used inflation metric, was at a relatively low 2.6 per cent. This figure saw a jump to 3.5 per cent the following month, peaking at 3.8 per cent in July. Since then, inflation has been on a gradual downward path. However, a growing consensus among economic forecasters, including those at Deutsche Bank and Pantheon Macroeconomics, now predicts a resurgence.
The Bank of England itself had previously projected inflation to return to its 2 per cent target by April 2026, a development that would have paved the way for interest rate reductions. These predictions have been significantly disrupted by the escalation of tensions in the Middle East, leading to a surge in oil and gas prices. Both the Bank’s Monetary Policy Committee (MPC) and the Government have issued warnings about a short-term increase in inflation. In response to these concerns, the MPC decided to maintain interest rates at 3.75 per cent on 19 March. The minutes from that meeting highlighted that energy price volatility would inevitably delay inflation’s return to the target level.
Thomas Pugh, chief economist at RSM UK, commented that the February inflation figures, while stable, offer little comfort to the Bank of England. He noted that fuel prices have already climbed in March, making it likely that inflation will rise to between 3.5 per cent and 4 per cent by year-end. Pugh further suggested that the Bank is unlikely to cut interest rates again in 2026 and might even consider further increases. This evolving economic climate raises critical questions for personal finances and prompts the need for proactive financial planning.
Impact on Your Savings
High inflation is generally unwelcome news for savers, as it diminishes the purchasing power of money held in bank accounts. The higher the inflation rate, the less your savings can buy. For instance, if you have £1,000 in savings and inflation is 3 per cent over a year, you would require £1,030 the following year to maintain the same spending power. Therefore, it is crucial for savers to actively seek the best possible interest rates.
Savers face a choice between fixing their savings rate for a set period, which guarantees a specific return but locks away funds, or opting for an easy-access account, where rates can fluctuate but funds remain readily available. James Blower, founder of The Savings Guru, explained that inflation is a dynamic factor, making it challenging to predict whether a fixed-rate savings product will outperform inflation over its term. He noted that while current inflation is 3 per cent, it is expected to rise, particularly with the conflict in the Middle East driving up energy prices.
Currently, the highest available fixed savings rate is 4.75 per cent from Market Harborough Building Society, although this requires locking funds away for three years until summer 2029. Other options include Close Brothers and Hodge, offering a 4.51 per cent five-year fixed rate. Blower acknowledged that these rates currently exceed inflation but offered no guarantee for their entire terms. For those prioritising flexibility, Trading 212 offers a 4.68 per cent cash ISA for new deposits, allowing unlimited withdrawals. This rate includes a 1.08 per cent bonus, meaning the rate will fall to 3.6 per cent after one year.
ISAs, unlike standard savings accounts, offer tax-free interest. The annual allowance for ISAs is £20,000, running from April to April. If this allowance has already been utilised, savers must consider traditional savings accounts.
An alternative to saving is investing. While savings typically offer guaranteed returns, investments carry the risk of capital loss as well as potential for higher long-term gains. Laura Suter, director of personal finance at AJ Bell, advised that individuals holding substantial amounts in cash should recognise that it is not the optimal strategy for long-term wealth growth. Historical data suggests that investing has historically been the most effective method for outperforming inflation. Despite recent volatility in investment markets, Suter indicated that long-term investing could be a viable strategy to mitigate the impact of rising inflation.
Regardless of the chosen path, Suter stressed the importance of ensuring your money is working as hard as possible. This involves actively comparing savings rates, utilising tax-efficient wrappers like ISAs, and avoiding the accumulation of large sums in low-interest accounts, all of which can help preserve spending power.
Navigating the Mortgage Market
Mortgage rates are not directly pegged to inflation, but they are indirectly influenced. Fixed-rate mortgages tend to mirror swap rates, which are determined by market expectations of the Bank of England’s future base rate movements. Unexpected increases in inflation can lead to the base rate being raised or remaining higher for longer. Conversely, a sudden drop in inflation could prompt rate cuts or a quicker decline.
According to Moneyfacts, the average rate for a two-year fixed mortgage has reached its highest point since February of last year, standing at 5.56 per cent, a significant increase from 4.83 per cent at the beginning of March. Similarly, the average rate for a five-year fixed mortgage has climbed from 4.95 per cent in early March to 5.54 per cent, marking the highest level since July 2024. Furthermore, over one-fifth of available mortgage products at the start of the month have been withdrawn from the market.
Property expert Jonathan Rolande commented that the current outlook suggests that instead of anticipated interest rate cuts this year, the best-case scenario might be no change, with a possibility of rates increasing. He advised those whose mortgage deals are nearing their end to consider locking in a new rate to safeguard against potential future increases. This strategy allows for a switch to a more favourable deal if rates subsequently decrease. Most lenders permit locking in a new rate up to six months before the current deal expires. Rolande suggested that fixing a mortgage now, if possible, offers peace of mind regarding payment stability, regardless of future rate fluctuations. He also recommended exploring the option of overpaying on a mortgage, if permitted by the lender without penalty, as this can significantly reduce overall interest paid and shorten the loan term. For example, an extra £200 per month on a £200,000 loan could potentially shave seven years off the term and save approximately £65,000 in interest.
Energy Price Outlook
A primary driver behind the anticipated resurgence of inflation is the surge in energy costs, largely attributable to geopolitical tensions in the Middle East. Chris O’Shea, CEO of Centrica, the owner of British Gas, indicated that the effective closure of the Strait of Hormuz has had a more pronounced impact on oil supply than gas, and it remains premature to predict the exact consequences for energy prices. However, he referenced a forecast by Cornwall Insight suggesting that household energy bills in England, Scotland, and Wales could rise by an average of £332 from July, following a decrease of £117 from April due to the energy price cap. O’Shea stated that if the current situation persists, such an increase would be “inescapable.”
Since the commencement of the conflict, oil and gas prices have escalated, with crude oil exceeding $100 a barrel. The Strait of Hormuz is a critical chokepoint, through which approximately 20 per cent of the world’s oil typically flows. Iran’s actions targeting shipping in this vital waterway have effectively brought transit to a standstill. O’Shea noted that only 3 to 4 per cent of global gas supply has been affected by the strait’s closure.
The next energy price cap, set by Ofgem, will take effect in May and cover the three months from July. Current projections indicate that the cap, which applies to customers on standard variable tariffs, could increase to £1,973 on 1 July. This represents a rise of approximately £332, or 20 per cent, for the average household. Ben Gallizzi, an energy expert at Uswitch.com, explained that this figure incorporates the rise in wholesale energy prices. However, he pointed out that it is still relatively early in the regulator’s observation period, meaning the final price cap level has the potential to change. While providers will likely adjust prices in line with the cap, consumers have the option to fix their energy costs, thereby insulating themselves from future tariff adjustments. Gallizzi advised that for those not already on a fixed energy deal, there are currently 21 tariffs available. Although prices have seen a slight increase recently, he recommended assessing available options for those seeking bill certainty. He emphasised the importance of conducting a quick comparison to identify tailored deals based on individual energy usage.
