Inflation soars to 5.1% as energy, fuel and clothing costs soar – how it affects your finances

INFLATION has soared to 5.1% – its highest in a decade – piling more pressure on household finances.

Rising prices have already pushed up bills and created a cost of living crisis for millions of Brits.

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Inflation is a measure of how much the price of goods, such as food or fuel, and services, such as haircuts or train tickets, has changed over time.

Overall inflation is the highest it’s been since September 2011, according to the latest data from the Office for National Statistics (ONS).

Citizens Advice has warned that one in ten families are on the brink as prices continue to rise and a cost of living crunch starts to bite.

Anyone struggling has been urged to check the extra help they can get – from energy bill schemes to welfare grants.

The ONS said today the price of fuel and second-hand cars helped push the inflation rate up, along with energy and clothing costs.

Fuel prices have soared in recent months, hitting a record high of 147p per litre for petrol and 151p for diesel, adding more to everyday costs.

Petrol prices jumped 7.2p per litre between October and November – the largest monthly rise on record, the ONS said.

Used car prices have jumped by hundreds of pounds this year as more people are buying second-hand vehicles.

Between April and November this year the average cost of a used car increased by more than 30%, the ONS said.

Meanwhile gas and electric bills have jumped 19% and 28% respectively in the year to October – the highest rate since 2009.

Millions of UK households have seen their household bills shoot up as a result of the price of energy rocketing.

Food and clothes prices have gone up too, with clothing and footwear up 1.1%, compared to a 2.6% fall this time last year.

The figures also show alcohol and tobacco prices have gone up after taxes on them were increased in the Autumn Budget.

Grant Fitzner, ONS chief economist, said: “A wide range of price rises contributed to another steep rise in inflation, which now stands at its highest rate for over a decade.

“The price of fuel increased notably, pushing average petrol prices higher than we have seen before.

“Clothing costs – which increased after falling this time last year – along with price rises for food, second-hand cars and increased tobacco duty all helped drive up inflation this month.

“The costs of goods produced by factories and the price of raw materials have continued to increase significantly to their highest rate for at least 12 years.”

How is inflation rising?

The rate of inflation is published each month by the Office for National Statistics (ONS), and this measures how much prices have changed on average over the past year.

The latest figure of 5.1% is up from 4.2% in October, 3.1% in September and 3.2% in August.

The rate of inflation is more than double the Bank of England (BoE) target of 2%.

A decision on raising interest rates is due from the central bank this week. It can increase what’s known as the base rate, which is currently at a record low of 0.1%.

By increasing the base rate, the BoE  hopes it can keep a handle on the rising costs of goods and services.

A rate rise had been expected before Christmas but the rise of the Omicron variant has dampened that in recent weeks.

In November the Bank of England predicted that inflation would hit 5% but not until April.

Chancellor Rishi Sunak said: “We know how challenging rising inflation can be for families and households which is why we’re spending £4.2bn to support living standards and provide targeted measures for the most vulnerable over the winter months.

“With a resurgence of the virus, the most important thing we can do to safeguard the economic recovery is for everyone to get boosted now.”

What does inflation mean for your finances?

The average increase in prices is usually based on how much things cost today compared to a year ago and is known as the inflation rate.

So if the rate of inflation is 2% it means that prices are generally 2% higher than they were this time last year.

The higher the rate of inflation the more prices are rising.

A higher rate of inflation means your money doesn’t go as far and you have to spend more. But how much you earn may not increase at the same rate and that could leave you with less in your pocket overall.

It also means that if inflation is higher than the interest you’re earning on your savings, you are effectively losing money.

A saver with £1,000 stashed away in an easy-access cash account that pays an interest rate of 0.6% for instance, would make just £6.

But inflation means that £1,000 today would be worth 3% less in a year’s time – effectively wiping £30 off your spending power.

Steven Cameron, pensions director at Aegon said: “Inflation has risen sharply in recent months and the latest rate of 5.1% is the highest in a decade, already hitting the ‘peak’ forecast for spring 2022, and almost reaching the highest level over 20 years of 5.2%.

“This will add to already heightened concerns regarding loss of purchasing power from cash savings and fixed incomes.

“Individuals will be hoping that such high price rises are not sustained over the long-term to avoid the damaging effects of inflation being compounded.

“Millions of people are already feeling the squeeze in the cost of living, particularly during a festive period when disposable incomes are often at their most stretched.”

This post first appeared on thesun.co.uk