Inflation soars to 5.1% – how it affects your money

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 the cost of living 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.

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 4.1% in October, 3.1% in September and 3.2% in August.

It’s the highest inflation has been since September 2011 according to the latest data from the Office for National Statistics (ONS).

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.”

The rate of inflation is more than double the Bank of England’s target of 2%.

A decision on raising interest rates is due from the central bank this week.

What does it 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