MILLIONS of households are set to feel even greater pressure on their finances as expert predict that inflation will hit an eye-watering 18.6%.
Inflation at this rate would mark the highest level in almost half a century, analysts at Citi have warned.
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Analysts told the FT that soaring energy prices would drive inflation to “entering the stratosphere”.
Benjamin Nabarro, chief UK economist at Citi, said he expects inflation to top 18% in January – a rate not seen since 1976, eclipsing even the oil crisis of the late 70s.
Inflation has already hit 10.1% – the highest rate since 1982, according to the Office of National Statistics.
The Bank of England has warned it could reach 13% or more by the end of the year, and expects the UK to fall into recession this winter.
Why is that a worry for UK households? The inflation rate indicates how the price of goods and services has changed over the past year.
A high rate of inflation indicates that the cost of everyday items is soaring.
That’s a particular problem when wages don’t keep up. When inflation outstrips salary growth, then workers effectively suffer a pay cut as their money doesn’t stretch as far as it used to.
And latest figures show that in “real terms”, workers saw a record 3% pay cut in the three months to June – the biggest fall since records began in 2001.
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Ben Yearsley, director at Shore Financial Planning, said: “No one really knows just how high inflation could climb, but it’s going to be a tough winter for millions of people.”
According to ONS figures, the prices of groceries including bakery goods, dairy, meat and vegetables have all increased over the past year.
Package holidays, clothing and footwear, and alcohol and tobacco were among the items which drove inflation up in July.
ONS chief economist Grant Fitzner said: “Price rises in other staple items, such as pet food, toilet rolls, toothbrushes and deodorants also pushed up inflation in July.”
Energy bills are a major problem for households too. Regulator Ofgem will reveal later this week what the price cap will rise to this autumn, and it is expected to hit more than £3,300.
But Yearsley said there are some positive indications: “Petrol has already come down around 10% from its peak, and shipping costs have fallen about 35% from their peak last year.
“Measures such as these will take time to filter through into the inflation rate, but it shows there are at least some small rays of light.”
How to protect against inflation?
It’s difficult to inflation-proof your finances – essentially you need to find a way to grow your money at a faster rate than the cost of essentials are rising.
For some people, this could mean investing – but this is risky and many don’t have spare cash to put in the stock market at the moment.
Having an emergency savings pot is helpful in times of inflation, to help cover any unexpected outgoings.
You might be able to ask for a pay rise at work, but there are no guarantees your company is in a position to offer one.
Be sure to make savings where you can – shop around for better deals on your car and home insurance, as well as broadband and mobile phone.
Save money by going to a cheaper supermarket, shopping for own-brand rather than premium products, and looking out for yellow-sticker bargains.
Make a budget and check your bank statements for any forgotten subscriptions you might be wasting money on.
Be sure to claim any financial support you’re entitled to as well – a benefits calculator can help you work out what you might qualify for.
Making extra cash in your spare time can help too. You can earn up to £7,500 by renting out your spare room without having to pay tax on that income until Rent a Room Relief.
And under the Property Allowance, you can earn up to £1,000 a year tax-free from renting out space on your property such as your driveway.
We’ve also look at other ways to earn cash at home, including taking online surveys or selling unwanted clothes and shoes.
