Imagine if a friend turned up unannounced to stay at your home. If they said to you, ‘Oh, don’t worry about me, I’m just passing through,’ how long would you expect them to stay?
A few days? Weeks, maybe? Months, at a pinch? You’d feel pretty put out if it was two years.
But that’s what happened with soaring inflation, which moved in, unwanted and unannounced two years ago this month.
Rising cost of living: Since May 2021, inflation has made itself very much at home
It was in May 2021 that the cost of living, as measured by the consumer price’s index rate of inflation, first lodged itself above the Bank of England’s target of 2 per cent.
Since then, inflation has made itself very much at home. Month after month it has pushed up the cost of our household bills and eaten into our grocery budgets. We wish it would just move out.
Yet the Bank of England has persisted in its message that inflation is transitory — in other words, just passing through.
These reassurances are starting to ring hollow to households. And last week financial markets started doubting them, too.
Mortgage fears
Mortgage lenders began to push up rates again over concerns inflation would not be falling any time soon and that the Bank of England would end up raising interest rates higher than previously forecast to counter it.
Analysts predict the Bank of England base rate will hit 5.5 per cent by January — several believe it could be higher. It’s already near a 15-year high at 4.5 per cent.
Some mortgage providers paused new lending altogether while they worked out what was going on in a very volatile market.
All of this means more pain for homeowners, who are seeing the cost of borrowing rise once again. Average two- and five-year fixed rate mortgages are now 5.38 per cent and 5.05 per cent respectively, according to analysts MoneyfactsCompare.
Back when inflation had only just moved in, some lenders were offering rates below 1 per cent. Homeowners due to remortgage from such deals are set for a nasty shock. So what to do?
Well, first, remember that inflation is only destructive if it rises faster than your income.
And, as my colleague Jessica Beard reports on pages 28-9, millions of former public sector workers benefit from pension income that keeps pace with inflation. The state pension similarly rose by 10.1 per cent last month, as it is also protected from inflation. And if the cost of living remains high, it will rise again next year.
Switch to save
Secondly, if you are a saver, now is not the time to be sitting on your hands. As Sylvia Morris reports here, there are deals of up to 5 per cent to be had. These won’t beat inflation but they do offer partial protection.
But you’re not going to get them by hoping your existing provider will do the right thing and raise your rate. It won’t, especially if you save with a High Street bank. You need to shop around.
Thirdly, use all your tax-free allowances abundantly. Very few savers have had to pay tax on their interest for the past decade or so as rates have stayed in the doldrums. But that is changing fast and could catch you by surprise.
If you earn up to £50,270 a year, you pay no tax on the first £1,000 of savings interest but 20 per cent on everything above that. If you found a savings account paying 5 per cent, you would start paying tax on interest when you had anything over £20,000 saved.
If you earn between £50,270 and £125,140, you pay 40 per cent tax on savings interest above £500. That means you would only have to have a smidge over £10,000 in a savings account earning 5 per cent interest to start paying tax.
If you earn over £125,140, you pay 45 per cent tax on all savings interest. That is equivalent to getting a rate of just 2.75 per cent if you put your cash in an account paying 5 per cent.
Income tax bands will remain frozen until at least April 2028, so millions more will be paying tax on their savings by then.
Use that Isa
Protect your savings by putting them in an Isa. You can squirrel away up to £20,000 every tax year — this allowance has never been more precious. We may be stuck with inflation for a while, but it doesn’t mean we should run it a bath and give it full access to our savings. Safeguard what you can.
