Inflation Soars to 3.5%, Highest in a Year—How It Affects Your Wallet
Inflation
increased to 3.5 percent in the year ending in April, as reported by the Office for National Statistics (ONS) on Wednesday.
The Consumer Prices Index (CPI), which measures inflation, is currently at its peak point in more than twelve months. In January last year, the rate stood at 4 percent, followed by 3.4 percent the next month. The previous March saw this index recorded at 3.2 percent.
The number announced today is significantly higher than the previous one.
Bank of England’s
2 percent target level.
Economists had largely forecasted that inflation would climb – partly because of a boost in
energy prices
Last month – although the Bank of England anticipated it would reach 3.4 percent.
The core Consumer Price Index (CPI), which excludes energy, food, alcohol, and tobacco, increased by 3.8 percent in the year ending April 2025, compared to a rise of 3.4 percent in the year ending March.
The inflation for food and non-alcoholic beverages was recorded at 3.4 percent, an increase from the 3 percent observed in April.
The ONS Acting Director-General, Grant Fitzner, stated: “There have been substantial rises in household
bills
led to a sharp increase in inflation.
Natural gas and electric power costs increased this month relative to significant decreases during the corresponding period last year, owing to modifications made by Ofgem.
energy price cap
.
Both water and sewage charges saw significant increases this year, along with rises in vehicle excise duties. These factors collectively drove the overall inflation rate to its peak since the start of last year.
Chancellor Rachel Reeves stated: “These numbers disappoint me since I’m aware that the burden of rising costs continues to press heavily upon individuals who are employed.”
We have come far from the high-double digit inflation experienced during the last government, yet I am committed to pushing harder and quicker to increase funds available for individuals.
What does the future hold for inflation?
Inflation is widely expected to stay high this year, but economists are divided on how high it will reach.
Some analysts, like those at Pantheon Macroeconomics, believe the number might reach 3.7 percent by September, yet they expect it to remain over 3 percent until next spring.
However, economists like Andrew Sentance argue that it might climb as high as 5 percent.
This month, the Bank of England reported in a document that past hikes in energy costs will probably cause CPI inflation to rise starting in April.
What is the implication of this for interest rates?
Increased inflation indicates that prices are escalating faster than they would under normal circumstances, which may lead the Bank to maintain higher rates.
interest rates
higher for longer.
The current interest rate stands at 4.5%, following reductions in February and May, with a pause in March.
Even though inflation is still well above the Bank’s 2 per cent target, there is an expectation that there will be
further rate cuts later this year
.
But that is not guaranteed. On Tuesday, the Bank’s chief economist Huw Pill said the Bank had been cutting rates too quickly.
Specialists have opined that interest rates ought to be reduced even with the increase in the inflation rate.
Thomas Pugh, an economist at RSM UK, stated, “The surge in April’s inflation isn’t expected to influence decisions regarding interest rate reductions. In fact, we anticipate that rates will be lowered at all but one remaining meeting this year, leading to a total of two additional decreases with the annual interest rate concluding at 3.75%.”
However, Robert Wood from Pantheon Macroeconomics stated that the Bank would “find it difficult” to reduce interest rates two additional times this year.
How will this affect mortgages, savings, and pensions?
Mortgages
Mortgages
are not immediately impacted by inflation, even though numerous products are influenced by the Bank’s base rate, which is affected by inflation.
Tracker product rates and standard variable mortgage rates adjust immediately whenever interest rates fluctuate.
Fixed mortgages
Often track swap rates, which are based on long-term forecasts for the direction of the base rate.
Mortgage rates are generally anticipated to decrease over the course of the year; however, they have shown a slight increase recently.
Considering Wednesday’s inflation rate was above what many economists anticipated, there is a possibility that mortgage rates might not decrease as rapidly as expected by some experts, and certain lending institutions may even decide to raise their rates.
Savings
High inflation is detrimental to savers since it diminishes the purchasing power of funds kept in banks. Consequently, a decrease in rates brings better prospects for savers.
The impact of inflation on the Bank’s interest rate similarly influences savers due to the base rate’s effect on savings rates.
Experts believe we are “past the peak” for
savings
, though there are some high rates that can still be snapped up.
For instance, Chip provides a straightforward cash ISA with an interest rate of 4.85 percent – comfortably above the current inflation level – although this does include a temporarily enhanced rate.
Atom Bank provides a savings account with an interest rate of 4.75 percent; however, this rate decreases during months when withdrawals are made.
Pensions
Rising inflation can erode
pensioners’
savings.
For instance, if you’re 67 years old and planning to retire next year with a savings pot of £87,500—approximately the average amount for someone over 50 as reported by Pension Bee—and both inflation stands at 3% and your investments grow by 3%, after one year, your total sum would increase to around £90,125.
However, in practical terms, it would hold precisely the same value as it does now, since inflation has eroded the possible increase.
Another aspect to consider is how inflation influences
annuity rates
.
Annuities provide a assured yearly income.
retirement
They provide an option besides withdrawing funds from a
pension pot
, which might eventually be depleted, especially if a retiree exceeds their anticipated lifespan.
Although they’ve fallen out of favor recently, increasing interest rates have enhanced the yearly returns one can earn from investments.
However, for retirees considering this option, timing could be crucial. Given that the Bank is anticipated to reduce interest rates even more, those rates might decrease soon.