Inflation hits 9% – a 40-year high – as energy surge drains us dry

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, comments on the ONS Consumer Price Inflation publication, showing inflation hits 9% – a 40-year high – as energy surge drains us dry.

Key points for comment:
  • CPI inflation surged again to 9% in April – up from 7% in March. It’s the highest CPI has been in 40 years.
  • Notable increases.
  • A dozen eye-watering price rises.
  • What it means for your savings.
Sarah Coles says:

“The surge in energy prices is draining us dry, after gas prices almost doubled in a year. In April, the  huge hike in the energy price cap pushed inflation to a 40-year high of 9%. Unfortunately, this doesn’t come as a massive surprise to anyone. After-all we have been living through this horrible period, so we know all-too well how expensive life is getting.

“Energy price hikes would be bad enough on their own, but we’re also having to deal with record fuel costs, eye-watering rises in supermarket prices and the soaring cost of home repairs and improvements.

“Figures out yesterday showed that, excluding bonuses, wages fell even further behind inflation, with public sector workers suffering particularly – as prices stretched way ahead of paltry pay rises. And things are set to get even worse, because the OBR is predicting the biggest fall in living standards in a generation.”

Notable increases:

“The energy price cap has clearly had a profound impact on our finances, with the cap rising 54% in April. When it’s added to the hike last October it brings overall energy price rises to unimaginable levels. The cost of gas has almost doubled in a year, and electricity prices are up by around half.

“These price rises have had an incredibly widespread impact. For those on the lowest incomes it has meant some really horrible decisions about the energy they can afford to use. However, even among those who consider themselves relatively comfortable, rocketing bills have forced them to cut back.

“What makes things even worse, is that we know that this is just the first blow, and we’re set for a follow-up in October that could send us reeling. The invasion of Ukraine sent oil and gas prices sky high, which will feed through into yet more pain later this year, when the cap is expected to rise anything between 30% and 50%.

“The rising oil price continues to cause enormous pain at the pumps. A year earlier the average petrol price was 125.5p, but in April it hit a record of 161.8p. It means filling up a 55-litre car in April cost £19.97 more than a year earlier. It’s no wonder that government figures show 40% of people are cutting back on non-essential journeys in order to save money.

“Food and non-alcoholic drink prices were rising faster again – up 6.7% in a year (5.9% in the year to March). There have been some really worrying rises in the prices of some staples including pasta (10.4%), milk (16.1%) and margarine (22.7%). The same ONS survey showed that 14% of people are most concerned about the price of food, and 2 in 5 (41%) are taking the worrying step of buying less of it. The proportion buying less is growing – up from 39% in the previous period and 18% at the beginning of the year.

“Unfortunately, these price rises aren’t over yet. The conflict in Ukraine has pushed up the price of food globally, but it has also accelerated the rising cost of animal feed and fertiliser, which are feeding through into farm costs. When you add in the cost of fuel for manufacturing and distribution, it will keep pushing prices up at the supermarket in the coming months.

“Prices in hotels and restaurants were also up 7.9%. This is due partly to the fact that VAT returned to its usual rate of 20%. Employers have been wrestling with higher costs of everything from ingredients to heating, lighting and staff costs, so they haven’t been able to absorb the rise, and have passed it straight on to customers.

“Anyone planning repairs and maintenance, or redecoration and refurbishment, is facing horrible price rises on all sides. Higher demand from people wanting to spend lockdown savings, coupled with supply chain problems across the world, has pushed the cost of materials for maintenance and repair up 16.8%. Meanwhile furniture prices have rocketed by 16.5% for household furniture and an eye-watering 32.8% for garden furniture. 

“Now that international travel has become so much easier, we’re clamouring for a getaway. A combination of booming demand and reduced flight schedules means the price of flights is up 12.5% in a year. And for those staying closer to home in cheaper accommodation there’s even worse news, because that cheap and cheerful UK break in a camp site or holiday centre is going to cost you 22.9% more this year.”

A dozen eye-watering price rises:
  1. Gas 95.5%
  2. Electricity 53.5%
  3. Garden furniture 32.8%
  4. Fuels and lubricants 31.4%
  5. Second-hand cars 27%
  6. Home contents insurance 23.5%
  7. Holiday centres and camp sites 22.9%
  8. Margarine and vegetable fats 22.7%
  9. Materials for maintenance and repair 16.8%
  10. Household furniture 16.5%
  11. Low-fat milk 16.1%
  12. Articles for babies 15.9%
What this means for savers:

“There’s good news and bad news. Savers will be very familiar with the bad news, as savings rates drop further behind soaring inflation, so every penny in savings accounts is losing money once inflation is taken into account.

“However, the good news is that savings rates are starting to rise. According to Moneyfacts, the average easy access deal now pays 0.39%, and the average one-year fixed rate pays 1.24%. Both are around three times higher than a year ago.

“You don’t need to settle for average though, because there has been an awful lot of movement among the most competitive rates, which are starting to rise in the wake of interest rate increases. You can now get 1.31% on an easy access account from Al Rayan Bank, with no strings attached, and a one-year fix from the same bank at 2.27%.

“This is still way behind inflation, but the real value in savings is the protection they offer you, especially when we’re entering a fairly uncertain time for the economy. Ideally anyone of working age should be working towards 3-6 months’ worth of essential expenses in an easy access savings account for emergencies. Then for any money you need for planned expenses in the next five years, it’s worth considering fixing for the most appropriate periods.

“For the four in five savers who have left their money languishing in easy access accounts with the high street banks – paying 0.1% or less – now is the time to move. The high street giants have passed on an insultingly small fraction of the rate rise to savers, so there’s no point holding on just in case they suddenly decide to do the decent thing,

“If you have savings you won’t need for five years or longer, it’s worth considering whether any extra money could be working harder for you in investments. These will rise and fall in value over the short term, but over 5-10 years or more they stand a much better chance of beating inflation than cash savings.”

 

Kindly shared by Hargreaves Lansdown

Main article photo courtesy of Pixabay