Money Wellness
Graphic of a red arrow going up with the word 'inflation' above it
category iconcost of living
calendar icon17 Jan 2024

Inflation rises to 4% heaping more pain on household finances

The rate that prices are rising went up at the end of the year having dropped consecutively since February 2023.

The Consumer Prices Index report from the Office of National Statistics (ONS), which tracks the average price of goods brought by UK households, rose to 4%. This is up from 3.9% in November – the lowest rate since October 2021.

The increase was driven by rises in tobacco prices – up 12.8% - due to new duty increases announced by the government in the Autumn Statement.

Food inflation continued to fall, with prices rising but at a much lower rate than this time last year. And alcohol inflation fell by 1.6% between November and December last year.

The prices of goods leaving factories saw little change, while the cost of raw materials remain lower than a year ago.

Inflation is the measure of how the price of goods and services has changed over the past year.

This rise has surprised many economists who had predicted further falls in January.

They also mean more pain for households struggling with the cost of living, with food prices remaining stubbornly high, coupled with an increase in energy bills, and wage rise increases cooling – down 6.6% compared to 7.3% a month earlier.

The rise will also be troubling for the Bank of England who will review interest rates when it next meets on 1 February.

At 4% it is far higher than the Bank of England’s target rate of 2%.

Interest rates remained unchanged at 5.25% in December. And, with 2.4 million fixed rate mortgages due to come to an end in 2024, homeowners hoping for a drop in interest rates could be disappointed.

What’s inflation?

Inflation is a measure of how prices of goods and services are changing in the UK.  It can have a big impact on people’s household finances.

Each month the ONS publishes the latest annual inflation rate, which measures the change in price of regularly purchases products – known as the basket of goods and services – compared with the same time the previous year.

Some goods contribute more to the overall inflation rate than others – if some products see a larger increase in prices, while others stay more stable, then inflation would be driven by the changing prices in that spending category.

So, how the headline inflation rate affects your household depends on which products you tend to spend your money on.

What it means for your household budget

Higher inflation means the cost of everyday essentials such as food, energy and fuel are rising.

The Bank of England bases its interest rate on inflation figures. It increases interest rates to help cool or reduce inflation and keeps them low when inflation is low.

The Bank of England paused interest rate rises when it met in December after 14 consecutive hikes, with the rate being held at 5.25%, the highest it has been since February 2008.

High interest rates is good news for savers but bad for homeowners who have seen their mortgages increase by more than £400.

Avatar of Caroline Chell

Caroline Chell

Caroline has worked in financial communications for more than 10 years, writing content on subjects such as pensions, mortgages, loans and credit cards, as well as stockbroking and investment advice.

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