The Office for National Statistics (ONS) reports that the rate of Consumer Price Index (CPI) inflation for January 2023 dropped to 10.1 percent. Over the past year, the rate of CPI inflation has remained extremely high and even reached a 41-year high of 11.1 percent in the last quarter of 2022.
Today’s figure is the latest sign that the economy is continuing to improve despite the fact the inflation rate continues to be high.
On a monthly basis, CPI inflation fell by 0.6 percent over the period, compared with a 0.1 percent drop in January 2022.
The largest downward contribution to the change in CPI annual inflation rate from December 2022 and January 2023 came from transport, restaurants and hotels.
According to the ONS, rising prices in alcoholic beverages and tobacco were found to have the largest partially offsetting upward contribution to the inflation rate change.
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In response to today’s news, Chancellor Jeremy Hunt said: “While any fall in inflation is welcome, the fight is far from over.
“High inflation strangles growth and causes pain for families and businesses – that’s why we must stick to the plan halve inflation this year, reduce debt and grow the economy.”
Inflation-hiked prices on goods and services has been one of the main contributors to the UK’s ongoing cost of living crisis. To mitigate the damage caused by the country’s high rate, the Bank of England has opted to raise the base rate ten times in the last year.
With the base rate now at four percent, financial institutions have been passing on the increase in interest rates to their savers. However, constant interventions from the central bank in addressing inflation have also resulted in mortgage and debt repayments going up due to the changes in interest rates.
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What does this mean for savings?
January 2023’s CPI figure represents the third consecutive month that CPI inflation has fallen amid the rise in the cost of living. The Bank of England currently forecasts the rate will drop further to four percent by the end of the year.
Despite this, the rate of inflation remains high and one of the consequences of this is that returns on savings will continue to be diminished. Even with the central bank’s interest rate increases, savers have been unable to overcome CPI inflation in the last year.
Alice Haine, personal finance analyst at Bestinvest, said the “big positive” with interest rate rises is that savings rates have also jumped “significantly in recent months, however she warned that with inflation still high, savers will still see “deeply negative” real returns on savings.
She added: “It is still a good idea to move money languishing in an account with an ultra-low interest rate to one offering better returns such as 3.1 percent for an easy-access account, up to seven percent for regular returns or a competitive 3.3 percent for NS&I’s Premium Bonds from March. Sadly, not everyone can afford to take advantage with many Britons choosing to raid their savings pots rather than top them up to help them cope with higher living costs.
“With the BoE expecting inflation to drop significantly this year, anyone that does have spare cash should lock in the best fixed rate possible – something that will pay off over the longer term when the gap between pay growth and inflation eventually narrows. They need to move fast though as lenders often end deals once they have attracted their target number of customers, with some of the most popular promotions having a shelf life of just two days.
“Ultimately, making your money work harder in a higher-interest account is a better option, even with high inflation eating away at returns, than leaving it in an account that pays little or no interest at all.”
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What does this mean for household budgets?
On top of savings being eroded, the purchasing power of consumers is being hacked away due to inflation. Disposable incomes are being hit hard by the UK’s high CPI rate and this looks set to continue for the foreseeable future.
As a result, real wages for Britons are falling at a time when interest rates are rising and tax allowances are being frozen, which is dragging people into paying more.
Budgeting will therefore become more of a priority for households even if many are trying to get by on a lot less than usual.
Ms Haine explained: “Inflation at 10.1 percent might be easier to digest than the 41-year peak of 11.1 percent achieved in October, but the headline rate remains in double-digit territory and is still five times the Bank of England’s target rate of two percent.
“High inflation has a very damaging effect on disposable incomes as it erodes purchasing power and eats into savings, forcing households to make spending cutbacks with repercussions for businesses.
“Match it with the highest interest rates since the financial crisis and it leaves consumers not only contending with falling real wages but also grappling with higher prices and borrowing costs.
“Throw in frozen tax thresholds and most households won’t be celebrating the lower inflation figure just yet. Instead, careful budgeting will remain a priority for now as they strive to keep everyday costs in line.”
What does this mean for mortgages?
While inflation did drop for the month of January 2023, further intervention from the Bank of England is expected which could affect homeowners. Mortgages have been impacted by the constant interest rate rises with experts from finder.com predicting another hike will be likely next month.
While many fixed-rate mortgages are priced in for the year, double-digit inflation remains a blow for those attempting to get onto the property ladder. Ms Haine highlighted that 1.4 million homeowners on fixed rates are seeing their mortgage deals expire this year which will be costly amid the economic turmoil.
She shared: “They are still likely to face a jump in their mortgage repayment when they refinance– even with better rates around – as they will be coming off a deal secured pre-December 2021 when the BoE first began increasing interest rates.”
On this issue, senior finance analyst Myron Jobson from interactive investor, said: “Higher interest rates increase the cost of borrowing for things like cars, loans and mortgages. The toxic mix of rising prices, rising borrowing costs and failing incomes in real terms threatens to batter household finances for some time to come. We are all feeling the effects of high inflation – the extent of which depends on how we spend our money.
“We all have our own inflation number, and it is worth keeping tabs on your spending habits to get a better idea of the goods and services that are eating most into your budget, and where you could cut back as the cost of living continues to rise. Look at what makes sense for you – not an arbitrary measurement from anyone else.”
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