UK inflation slowed last month on the back of lower petrol prices but remained in double figures as household budgets continue to come under pressure. The latest figures from the Office for National Statistics (ONS) revealed that Consumer Prices Index (CPI) inflation fell to 10.1 per cent in March from 10.4 per cent in February.
However, it remained higher than experts had predicted as food and drink prices continued to soar - economists had forecast it would be 9.8 per cent. ONS chief economist Grant Fitzner, said: “Inflation eased slightly in March, but remains at a high level.
“The main drivers of the decline were motor fuel prices and heating oil costs, both of which fell after sharp rises at the same time last year. Clothing, furniture and household goods prices increased, but more slowly than a year ago, these were partially offset by the cost of food, which is still climbing steeply, with bread and cereal price inflation at a record high.”
What 10.1% inflation means for your personal finances
Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, explained that decreasing inflation will come as a relief for households, offering hope that the financial squeeze is finally starting to ease up, although double-digit inflation won’t deliver much relief to wallets and purses just yet as “prices are still rising at rates that would have seemed extraordinary at the start of last year”.
Food and non-alcoholic beverages rose by a staggering 19.2 per cent in the year to March, up from 18.2 per cent in February - the highest annual rate for over 45 years.
Alice said: “Disposable incomes are still very much under the cosh. When you consider the additional challenges posed by higher mortgage costs, falling real incomes, higher taxes and the prospect that the Bank of England (BoE) could still hike interest rates for the 12th time in a row next month, households should not start splashing the cash just yet.
“People still need to spend wisely by living within their means, avoiding expensive debt and saving and investing to shore up their financial futures.”
The BoE expects inflation to plunge by the end of the year and with the UK Government’s £2,500 Energy Price Guarantee extended until the end of June and energy bills set to fall from there because of lower wholesale energy prices, the summer months certainly look brighter.
Looking ahead, a much sharper drop in the inflation rate is expected in April, as the figures will no longer be comparable with the period before Russia invaded Ukraine when energy prices were lower.
Mortgages and property market
Inflation at 10.1 per cent will continue to pose a challenge for mortgages and the wider property market, which is facing an affordability crisis amid high interest rates and falling real incomes.
The good news, however, is that although interest rates are at their highest level since the financial crisis, mortgage rates have been on the slide in recent months as many lenders believe interest rates have either already peaked or will do so soon - resulting in more attractively priced products hitting the mortgage market.
Alice explained: “With fixed-rate deals significantly more competitive than they were at the end of last year, and more products to choose between, borrowers must now decide whether taking a two-year or five-year deal will be more cost-effective or whether to take the risk of a variable deal if rates start to edge down again.
“The International Monetary Fund (IMF) expects the increases in borrowing costs to be temporary once inflation is brought under control, but with such a difficult decision to make, first-time buyers or those looking to refinance should consult a reputable mortgage broker to help them find the right deal for their situation. Just don’t overstretch yourself as living costs are still high and with property prices on the slide, the last thing a buyer wants is to fall into negative equity.”
Savings
For savers, softening inflation is good news as it means the value of their savings will improve though with price rises still in the double-digits the real returns on cash savings will still be deeply negative.
Alice said: “Thankfully, with savings rates edging up dramatically over the past year and inflation expected to slide by the fourth quarter, savers can start imagining a future where they actually make a gain in real terms. Acting now by moving money languishing in an account with an ultra-low interest rate to one offering better returns will certainly pay off in the long term if inflation really does retreat as fast as is hoped.
“Opting for a long-term fix may also be a wise move for those that want to ensure their money works as hard as possible if interest rates do edge down in the future.”
However, Alice warns: “Remember, while a high-interest, easy-access savings account can be a great place to hold an emergency fund, it might not be the best storage facility for those with surplus money.
“Holding too much in a savings account puts savers at risk of breaching their Personal Savings Allowance, which allows savers to earn interest on their income without paying tax.”
This allowance has remained the same since 2016 - with basic rate taxpayers given a generous £1,000 personal savings allowance, those paying the higher 40 per cent tax rate entitled to a £500 allowance and additional tax rate payers receiving no savings allowance at all.
However, with interest rates now at a fresh high of 4.25% and income tax thresholds either frozen or reduced, more people could find their existing cash savings subject to tax - so keeping too much cash in your emergency pot or other savings accounts can be risky.
Alice suggests savers should consider utilising their £20,000 ISA allowance, which allows them to earn income without paying tax.
Meanwhile, pension savers nearing retirement, who want to beat high inflation over the long-term, could also consider boosting contributions to their workplace and personal pensions.
Pension saving comes with generous tax relief, which is applied to people’s contributions at their marginal rate of income tax.
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