Inflation eases to 10.7%: What this means for your personal finances

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, comments:

“UK inflation may have eased for the first time since August, dropping to 10.7% in the 12 months to November from 11.1% the previous month, but this will offer little comfort for consumers whose household finances are still being hammered by rapidly rising interest rates, falling real incomes, a long recession and the highest tax burden since the Second World War.

“At 10.7%, inflation remains more than double the 5.1% recorded in November 2021 and more than five times the Bank of England’s target of 2% highlighting just how squeezed disposable incomes have become over the past year.

“November’s inflation reading was largely driven by rising gas and electricity prices despite LIz Truss’s Energy Price Guarantee, as well as higher food and non-alcoholic prices, which rose by a staggering 16.5% on the year to November, up from 16.4% in October, the 16^th consecutive monthly increase, as inflationary pressures on ingredients, labour and transportation drove up costs in the food industry.

“While tearaway price rises have become the norm over the course of 2022, devastating household finances in the process, the hope is that inflation is now past its peak with the Bank of England expecting the headline rate to fall rapidly from the middle of 2023 and halve by the fourth quarter - easing the cost-of-living squeeze for consumer budgets across the country.

"With the high inflation of 2022 largely caused by global challenges, such as the war in Ukraine, surging energy prices and supply chain constraints, there are never any guarantees. Still, with interest rates continuing to rise as the BoE strives to bring inflation back to its pre-pandemic levels, mortgage costs significantly higher than the past 10 years and a long recession on the cards, inflation is likely to retreat from here as consumption wanes.”

“The headline inflation rate may have eased, but a double-digit figure will still cause significant financial strain for consumers. High inflation has a devastating effect on the real value of cash because it erodes spending power and eats away at savings making it very hard for ordinary people to maintain their living standards.

“With higher borrowing costs to contend with than a year ago, the highest tax burden since the Second World War and real wages falling 2.7%, it’s easy to see why budgeting tips are trending as household budgets get squeezed in every direction.

“The inflation rate may be lower, but it still means the goods and services people spend on are 10.7% more expensive on average than they were a year ago. With a recession looming, households should prepare their finances for the challenges that an economic downturn presents – namely the risk of job loss or stagnating pay growth.

“There’s no doubt 2023 will be another challenging year for consumers and with worker’s incomes not stretching as far, now could be a good time to draw up a budget to ensure you not only live within your means but also build up a rainy day fund for any unexpected events. A careful analysis of income and outgoings can help people identify where they are overspending and how to allocate their money more wisely.

“With property prices on the wane, mortgage costs set to jump for many and energy prices going up from April, reining in the Christmas spend and slashing budgets before the new year starts is a sensible strategy. While it might not seem in keeping with the festive mood, nobody wants to find themselves struggling to pay for the essentials, such as mortgages or rents, food and household bills.”

“With the base rate now at 3% and expectations it will jump to 3.5% on Thursday as the BoE’s battle against price and wage growth persists, mortgage rates are perilously high when you compare them to the past decade when cheap money became the norm.

“While interest rates are now expected to peak at a lower than previously feared 4.5% next year, mortgage rates are not likely to jump up significantly as rate increases have already been priced in.

“The average two- and -five-year fixes are now below 6%* - down from the highs seen in October when the country was still reeling from the impact of former chancellor Kwasi Kwarteng’s disastrous mini budget.

"Banks and building societies may even cut the costs of fixed-rate mortgages further, something that could be helped along by a fall in demand as affordability becomes the main issue for first-time buyers and those looking to refinance.

“The higher cost of living has been hurting disposable incomes for some time now - something that will be noted by lenders when they make their affordability assessments.

"Those whose fixed-rate deals expire next year face much higher repayment costs with average repayment hikes of around £250 a month according to the BoE, when they switch onto their next product. As a result, mortgage approvals could slow further after dropping to their lowest level in October since the lockdown in June 2020. With the property market on the slide and a long recession ahead, buyers will have difficult decisions to make if they want to buy or remortgage now.”

“Double digit inflation has a devastating effect on people’s nest eggs, delivering deeply negative returns on money held in accounts despite the rapid jump in savings rates over the past couple of months.

“However, with the BoE expecting inflation to halve by this time next year, locking in the best fixed rate you could pay off over the longer term when the gap between pay growth and inflation narrows.

“Even with the top easy-access accounts now at 2.85% and regular savings at 7%, some savers might be tempted to see if a higher bank rate will push those numbers up further. However, savings rates have fallen since October when interest rate expectations soared in the wake of Kwarteng’s mini budget. With the pace of interest rate rises expected to slow, there may be further falls in savings rates to come so acting quickly to secure the best deal makes sense.

“For those looking to save over the long-term, one of the savviest inflation-beating strategies involves increasing pension contributions. This is because money invested not only benefits from the beauty of compounding over the long term, but it also protects against income tax (which is rising) because tax relief is applied to your pension contributions at your highest rate of income tax.

“While basic rate taxpayers get 20% added to their pot with each contribution, those on the higher 40% tax rate get a further 20% in tax relief, while additional rate taxpayers receive a further 25% back. For every £1,000 gross contribution paid into a pension by a 40% taxpayer, the net cost is just £600 giving your pot a generous £400 bump-up in tax relief.”

* According to Moneyfacts