UK inflation soared to its highest point in 10 months in January, according to the latest Office for National Statistics (ONS) data.
ONS has said that The Consumer Prices Index (CPI) inflation rate increased to 3% in January 2025, up from 2.5% in December 2024.
This was higher than analysts’ predictions, which had estimated a rate of approximately 2.8%.
But how will this jump in inflation affect our personal finances in our everyday lives?
What is inflation?
“Inflation is the rate at which the general level of prices for goods and services rises and falls over time, reducing or increasing the purchasing power of money,” explains Matthew Parden, CEO of money management app Marygold & Co. “Inflation is typically measured by tracking price changes in a basket of goods and services over a specific period, with the most common measures of inflation being the Consumer Price Index and the Retail Price Index.”
A number of factors have contributed towards this recent rise.
“January’s inflation rise, potentially an anomaly for this year, was mainly due to smaller-than-usual drops in air fares, influenced by holiday flight timings,” says Parden. “Food and drink prices, especially for meat, bread, and cereals, also increased after falling last year and additionally, private school fees increased by nearly 13% due to new VAT rules.”
How could this inflation jump affect our spending?
“Energy bills are the biggest financial worry for British households according to NerdWallet UK’s research, but day-to-day it’s the supermarket checkout where consumers notice inflation eroding their spending power,” says Adam French, consumer finance expert at NerdWallet UK. “The rising cost of food and other household essentials continues to pile financial stress onto struggling families.
“With the annual rate of inflation already hitting 3% and food costs identified as one of the major upward contributors, finding ways to reduce spending on groceries is therefore crucial for cash-strapped households to keep a grip on spiralling costs.”
Certain products tend to see sharper price hikes than others.
“The prices for food and non-alcoholic drinks, including staples like meat, bread, and cereals, have increased, meaning that grocery bills will be higher and will prompt shoppers to look for cheaper alternatives or reduce spending on non-essential items,” says Parden.
How does inflation affect our savings?
“Inflation eats away at cash savings by reducing their purchasing power,” says Parden. “As prices rise, the value of the money you’ve saved decreases, meaning it won’t stretch as far as it used to. For investment returns, the dynamics are similar.”
French advises consumers to move their money into the most competitive accounts to prevent their hard-earned cash from eroding.
“Easy-access savings accounts from providers like Chip and Plum offer rates between 4% and 5%,” says French. “For those who save smaller amounts regularly, some of the best regular savings accounts offer rates between 6% and 8%, with First Direct notably offering a 12-month fixed rate of 7%.
“Additionally, some current accounts provide cashback on spending or interest on balances.”
How does inflation affect borrowing?
“The announcement that inflation has risen to 3% could deal a minor blow to the mortgage market in the short term, but it is not unexpected,” says Ryan Etchells, chief commercial officer at property lender Together.
We may also see further increases, because of inflationary factors including higher energy costs and wage growth, as well as the potential impact of US president Donald Trump’s tariffs on the UK economy, adds Etchells.
“Looking longer term, stubborn inflation, if it materialises, may lead to the Bank [of England] holding the base rate or cutting more slowly across 2025 than predicted by most economists at the end of last year,” says Etchells. “This is one factor which will affect mortgage lenders’ costs of funds and lenders’ decisions for future rate cuts.”
Any advice on what people can do about inflation to save or protect their finances?
Firstly, reassess your budget.
“If you haven’t already, now’s the time to track your spending and cut back on non-essentials,” recommends Ebony Cropper, a money saving expert at Money Wellness. “Consider switching to own-brand products at the supermarket, shopping around for better energy deals, and making the most of discounts or cashback offers.”
Secondly, look around at the interest rates of different bank accounts.
“Sticking those funds in one of the best savings accounts, which are currently paying almost 5% interest, could put £200 or more back in your pocket,” says French.
And lastly, focus on a long-term strategy.
“Focus on maintaining a diversified investment portfolio, and ensure your savings are in accounts that help combat inflation’s impact,” advises Parden. “Patience and consistency are crucial in navigating inflation without overreacting.”
