Inflation hits 6.2%, and worse is yet to come: how to weather the storm

CPI inflation is up again to 6.2% in February – from 5.5% in January. It’s the highest CPI has been since 1992. Notable increases. The rising cost of a dozen essentials. What savers should do.

The ONS has released inflation figures for February: Consumer price inflation, UK – Office for National Statistics

It has also produced an inflation calculator so people can see how inflation affects them personally: How is inflation affecting your household costs? – Office for National Statistics (ons.gov.uk)

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown: “Inflation has hit a 30-year high, and worse is yet to come. The perfect storm of massive fuel and energy price rises, accompanied by food price hikes, supply chain problems and booming demand from those with lockdown savings to spend, pushed prices into the stratosphere. And this was even before the conflict in Ukraine began. By the time we get to April, and the massive energy price hike, millions of people will be feeling the pain of rising prices.

We will have to wait and see what the Spring Statement offers in terms of relief. There’s some hope there will be help for those on the lowest incomes. However, a Chancellor with a keen eye on the deficit may not be prepared to loosen the purse strings in a way that makes a material difference, so it may be still be up to us to do what we can to stay within our budget.

For those on higher incomes, with some wriggle room, and luxuries left to cut, there may well be things they can do without. If you haven’t yet drawn up a budget to see where the savings are lurking, now is the time.

However, those whose finances are already on a knife edge face the misery of choosing between cutting essentials  or racking up debts that could make things even worse in the long run. If you’re in this position, it’s worth talking to a charity like Citizens Advice. They will know whether you can get more help from the government, or from alternative schemes run by charities and other organisations. At the very least, you’ll be able to talk to someone who understands what you’re going through, and can help you get any help that’s available.

Notable increases

Unsurprisingly, the rocketing price of fuel lies behind a big chunk of inflation, after hitting a record high in February, and rising 22.8% in a year. A year earlier the average petrol price was 120.2p, but in February it hit 147.6p. It means filling up a 55-litre car in February cost £15.07 more than a year earlier. The really alarming thing about this figure is that we know it kept climbing, and the RAC puts the current cost of unleaded at £167p per litre.

The energy price cap has kept a lid on gas and electricity prices, but still gas prices are up 28.3% and electricity 19.2%. This is bad enough, but it’s going to get worse in April when the price cap rises more than 50%.

Food and non-alcoholic drink prices were rising faster again – up 5.1% in a year. This may not be as striking as other price rises in the basket, but these are essentials we can’t live without, so these rises hit hard. The invasion of Ukraine will push these price rises even higher, as global food prices have soared, and energy and fuel prices means the cost of manufacturing and transporting food is also sky high.

The cost of second-hand cars has continued to accelerate, up 30.6%, and made the biggest contribution to inflation on record. It’s facing a perfect storm: fewer used cars are coming to market as people extend leases; new car shortages from a year earlier are feeding through into a shortage of nearly new cars today; and people are less likely to be trading in their old car for a new one. Meanwhile, demand is booming as people turn away from public transport and more settle for second hand, because of the long waiting lists for new cars.

Clothes and shoes prices jumped 8.9%, as a result of odd sales patterns during the pandemic. Normally prices rise in February, after the January sales give way to new stock. However, a year ago we were in lockdown, and retailers were still offering generous discounts to shift stock. We’re following a more normal pattern this year, so annual price rises are higher than usual.

Household furniture prices also jumped by 14.7% in a year. More of us spending longer at home has taken its toll, so some of the extra demand is vital replacement. Some of it is a desire to freshen up homes we’re sick of, and some is because this is how we decided to spend our lockdown savings. However, on the other side of the price equation, there are also huge supply issues, which is forcing retailers to hike prices.

The cost of flights is also taking off, up 20.2% in a year. After so long without a holiday, we’re spending a chunk of lockdown savings on getting away. Meanwhile, beleaguered airlines are running with fewer flights to help make ends meet, so getting on a plane is far more expensive than this time last year. However, not all of us are able to stretch to an overseas break this year, which is one reason why the cost of cheaper domestic holiday accommodation is soaring, with the price of camp sites, youth hostels and holiday centres up an eye-watering 23.9%.

There has been a big jump in the cost of reading too, with books up 14.3%, and non-fiction books in particular up 17%. However, these figures tend to be influenced to a large extent by the price points of the best sellers, so we could see these hikes fall in subsequent months.

The rising cost of a dozen essentials

Liquid fuels (including heating oil) 52.9%

Gas 28.3%

Petrol 22.8%

Electricity 19.2%

House contents insurance 17.2%

Marmalade and honey 16.1%

Materials for maintenance and repair 13.6%

Fridges and freezers 13.4%

Sauces 12.7%

Articles for babies 12.1%

Low fat milk 11.1%

Coffee 10.3%

What this means for savers

The time when your savings could keep pace with inflation is a vanishing and distant memory. Now we’re watching rates drop even further behind, despite three Bank of England rate hikes.

The problem lies in the ‘retreat to familiarity’ we saw during the pandemic, when savers flooded back to the high street with their savings. This gave the high street giants plenty of cash, so they didn’t need to boost savings rates to attract more money. All this money also meant they could afford to keep offering cheap mortgages. In order to compete, the newer banks have also had to keep their mortgage rates low, which means they can’t afford to do an awful lot with their savings rates either.

The more positive news is that we are seeing rates creep up. The best easy access accounts are slowly rising in the wake of interest rates. The best without restrictions is currently offering 0,84% – up from 0,73% a month earlier. We can expect it to slowly work its way up to 1%. But this is a drop in the ocean with inflation running at 6.2%.

There’s still an essential role for savings – as a safety net for emergencies – so we all need 3-6 months’ worth of essential expenses in an easy access savings account. However, once you have your emergency fund, and money you need for planned expenses in the next five years, it’s worth considering whether any extra money could be working harder for you in investments. These will rise and fall in value over the short term , but over 5-10 years or more they stand a much better chance of beating inflation than cash savings.”