What UK inflation’s too-slow fall means for your finances: 5 factors to consider

Published on July 13, 2023 by Andrew
A “slip hazard” warning sign on a leafy and rocky downhill path

The latest figures from the Office for National Statistics (ONS) confirm that UK inflation’s slow fall halted in the 12 months to May 2023.

The Consumer Prices Index (CPI) rose by 8.7%, the same figure as in April.

While this still represents a fall from its October 2022 peak of 11.1%, it does mean that inflation is falling more slowly than predicted, and slower than the Bank of England (BoE) would like.

The BoE’s Monetary Policy Committee (MPC) reacted by raising its base rate for the 13th consecutive time, to 5%.

But what does this mean for your money and your long-term financial plans? Here are five factors to consider.

1. Budget for your personal inflation figure, not the headline rate

Despite an 11.1% peak for the CPI, some goods and services have increased more than others, with food and non-alcoholic drink prices particularly affected.

The BBC has confirmed the price rise for key grocery items in the 12 months to April 2023:

  • Sugar – 47%
  • Cheddar cheese – 39%
  • Eggs – 37%
  • Milk – 33%
  • Potatoes – 28% 
  • Sliced white bread – 28%

These huge rises in shopping staples have hit many poorer families hard. So too have rising fuel and energy bills.

But the cost of living crisis has hit households across the UK, regardless of budget. If you have a large home or run more than one car, the effects of rising gas prices might have hit you hard.

You can read about understanding your personal inflation amount by reading our December 2022 blog, which also has a link to the ONS’s personal inflation calculator.

2. Check-in with your emergency budget

Even allowing for the BoE’s most recent base rate rise, the interest on your savings account is likely to be much lower.

This means that your cash savings are effectively losing value in real terms. Checking in with your emergency fund is key.

Ideally, you will have enough money put aside in an easy access savings account to cover around three to six months of household expenditure but be sure not to hold too much.

Regular check-ins will help to ensure you have enough. You should also consider moving any excess – possibly into an ISA or other investment vehicle (more on which later).

3. Inflation erodes the buying power of your pension so top-up if you can

Just as high inflation erodes the buying power of your cash savings, it does the same to the value of your pension pot.

Your regular withdrawals won’t go as far as they have been. If you are in flexi-access drawdown, consider rethinking your budget. Remember, though, that some annuities can be set to rise each year to combat inflation, and your State Pension will already do this thanks to the triple lock.

If you aren’t yet retired, consider upping your contributions if you can afford to, especially in light of the recent rise to the Annual Allowance.

4. Consider other investments options too

If you have excess cash losing its real terms value in accounts with poor interest rates, you might consider investing.

You’ll need to have a long-term goal in mind. Ideally, one that is at least five or even 10 years away.

Investing carries risk so you’ll also need to be sure about your risk profile and your capacity for loss.

5. Inflation could still fall sharply this year

The BoE has a 2% target for inflation and the base rate is one tool it uses to try to keep inflation under control.

Since December 2021, the MPC has raised its base rate at 13 consecutive meetings, sending it soaring from 0.1% to 5%.

It is hoped that the latest rise will discourage borrowing, thereby encouraging saving and meaning that we all spend less. Decreased demand should then lead to falling inflation.

While this plan hasn’t worked too well as yet, the BoE is still predicting that inflation will return to 2% by the end of 2024. This is still 18 months away, but it does suggest there is light at the end of the tunnel. 

Get in touch

If you have any concerns about the effect inflation might have on your budgeting, or you have questions about any other aspect of your long-term retirement plans, get in touch now. Email info@thepensionplanner.co.uk or call 0800 0787 182. 

Please note:

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Your pension income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

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