Britons face grim forecast of up to £2,000 hike in bills as inflation hits 10-year high 

Britons face grim forecast of up to 2000 hike in


By Victoria Bischoff, Money Mail Editor for the Daily Mail 

A little inflation can be a good thing. Without it, people may hold back from spending because they expect prices to fall – putting jobs at risk. But with prices now rising at the fastest rate in almost a decade – and the Bank of England under pressure to raise interest rates – what does it mean for you?

Household bills

Inflation – put simply, when goods and services become more expensive – is often called a stealth tax because if wages fail to rise in line with prices, you find the pound in your pocket does not stretch as far.

Everyone’s personal inflation rate will be different, because it depends on what you spend their money on. But some of the biggest drivers of inflation right now are soaring gas and electricity prices. 

This badly affects millions of households who are not on fixed tariffs for their utilities. Petrol prices are also going through the roof, so motorists will also see their budgets squeezed. Food prices are surging, too.

Borrowing

In theory, inflation is good for borrowers because it erodes the value of outstanding debt.

‘If you had taken out a loan 25 years ago, inflation in the interim would have halved the spending power of the money you owed,’ says Sarah Coles, of investment firm Hargreaves Lansdown. In other words, your debt is worth half as much in real terms.

Yet if the Bank of England increases interest rates to keep a lid on the spiralling cost of living, this would be bad news for all types of borrowers, from homeowners to credit card customers.

If the base rate rose to 0.75 per cent, it would add around £600 a year to the cost of a typical £150,000 home loan, according to figures from finance experts AJ Bell. But even if rates do rise as is now widely expected, they will still be very low by historical standards. Homeowners can protect themselves by locking into a fixed deal.

Savings

Higher inflation is bad news for savers. It eats away at the spending power of their money and means it will not stretch as far in the future.

There is currently no single cash account that matches, let alone beats, rising prices.

‘Inflation is now more than four times higher than interest rates paid on easy access accounts,’ says Becky O’Conner, head of pensions and savings at Interactive Investor.

Many big banks pay a miserly 0.01 per cent. If inflation remains at its current level, £1,000 would lose around £40 of its buying power.

While an interest rate rise would be good news for savers on the face of it, there is a strong chance that many banks will not pass the increase on to savers in full, if at all. Even if they do, it would be unlikely to boost rates by enough to protect savings from the effects of inflation.

Pensions

Soaring prices are a major blow for pensioners. State payouts are supposed be protected against rising inflation, but the increase set for April next year is based on September’s figure of 3.1 per cent.

With inflation now expected to hit 5 per cent in early spring, pensioners face a real-terms drop in their income. They are also likely to be hardest-hit by soaring energy bills, as they tend to spend more time at home with the heating dialled up higher.

That’s why many were so disappointed at the decision to ditch the triple lock, which would have seen State pensions rise by as much as 8.3 per cent in line with earnings.

Pictured: A couple look at a window display at a real estate office (stock image). If inflation pushes up interest rates, it could put a dampener on house prices

Pictured: A couple look at a window display at a real estate office (stock image). If inflation pushes up interest rates, it could put a dampener on house prices

‘Retirees may also find they need to increase withdrawals from private pension pots so that their income keeps pace with rising inflation,’ Charlie Musson, of AJ Bell says.

There is some good news. If interest rates rise, this could push up rates paid by annuities, which provide an income in retirement.

However, those who have already purchased a fixed-rate annuity would not see any benefit.

Investments

In the short term, an inflation shock can hurt the stock market. ‘Companies with high valuations based on expected future earnings growth could be hit first,’ says Mr Musson, ‘as the higher cost of living may mean people have less to spend’. 

However, in the long run, investing in shares and funds is generally considered a much better hedge against inflation than cash.

Interest rate rises can also be bad news for markets, as when returns on lower-risk investments such as bonds improve, savers often prefer to put their money in these rather than shares. 

Rates would have to rise significantly for this to happen, as they are so low to start with. Those locked into fixed-rate securities, such as government bonds, will also not take kindly to rate rises as these will suddenly not look as competitive. With less demand, their value will drop should investors want to sell them.

House prices

Property is often viewed as a hedge against inflation. But if it pushes up interest rates, this could put a dampener on house prices.

Buyers could be put off by higher mortgage costs, and owners who have overstretched are at risk of being unable to afford their monthly bills. Yet with demand vastly outstripping supply, experts say significant falls are unlikely in the near future. 



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