New figures show that UK inflation is now at its highest rate since November 2014.
The data, from the Office for National Statistics (ONS), shows that the Consumer Prices Index (CPI) rose to 1.6% in December, up sharply from 1.2% in November. The Retail Prices Index (RPI), which includes housing costs, rose from 2.2% to 2.5%.
Rising air fares and food prices contributed to the unexpectedly sharp rise, as the effects of the falling pound start to be felt.
Reacting to the figures, Mike Prestwood of the ONS, said: “This is the highest CPI has been for over two years, though the annual rate remains below the Bank of England’s target and low by historical standards.”
He continued: “Rising air fares and food prices, along with petrol prices falling less than last December, all helped to push up the rate of inflation. Rising raw material costs also continued to push up the prices of goods leaving factories.”
There were also signs that the rate of inflation will rise further as we head in to 2017, with the cost of energy used by some businesses rising by nearly 16%.
If the rate of inflation continues to rise, people on fixed incomes, and savers, will be the first to feel the pain.
Whilst the basic state pension benefits from the triple lock; meaning it rises in line with inflation, earnings or 2.5%, whichever is higher. Thousands of pensioners have previously bought a level Annuity, which means their income never increases and consequently offers no protection against inflation. The sharp rise in inflation will erode their income more quickly than was previously the case.
Savers, who are also often pensioners, will also be affected.
For nearly a decade savers have faced an ongoing battle to find a real, above inflation, return. There are currently no savings accounts which beat inflation. Even if savers tie up their capital for five years, they will see a real terms loss, which will only increase if the rate of inflation continues to pick up.
Workers will not be immune to the effects of higher inflation either.
Over the past few years, wages have risen at a slower rate than prices. If inflation continues to rise sharply, wage growth is unlikely to keep up.
That will cause financial hardship for many families, especially if interest rates rise too.
The usual counter measure deployed by the Bank of England to keep a lid on inflation, is to push up interest rates.
However, after cutting interest rates just five months ago, the Bank is likely to be reluctant to increase base rate in the short term.
Over time though, if inflation heads above their target, it may have no other choice.
Any increase, assuming it was passed on by banks and building societies, would be welcomed by savers. However, borrowers, especially those with large mortgages, who have been used to a decade of low interest rates, would naturally be less enthusiastic.
There seems to be little doubt that the rate of inflation will speed up in 2017, the full effects though, will only be felt over time.