Inflation jumps to 3.1% in blow for Burnham just weeks before the Budget – what it means for YOUR money

THE UK’s inflation rate has risen to 3.1% in a fresh hit for Prime Minister Andy Burnham, official figures show. It’s a small increase from the 2.9% seen in the 12 months to July, according to the Office for National Statistics, and will pile more pressure onto struggling household budgets. The news is also a blow for Prime Minister Andy Burnham and his Chancellor John Healey, who have pledged to keep costs down for households. Inflation is a measure of how fast the costs of goods and services are rising. Sign up for the Money newsletter Thank you! Rising inflation means prices are going up faster than they were the month before, pushing up grocery and household bills. Today’s increase was in line with market expectations, and was largely driven by higher fuel prices, which are at their highest level since 2022. The ongoing conflict in the Middle East has severely disrupted the production and transportation of fuel, which has made it more expensive. Grant Fitzner, chief economist at the ONS, said: “Sharp price rises for petrol and diesel pushed inflation up again in August. “Higher airfares, particularly for long-haul journeys, also contributed to the increase. “Rising crude oil and petrol prices increased both the annual cost of raw materials and the price of goods leaving factories respectively.” Most read in Money Meanwhile, the energy price cap rose by 13% in July after the conflict in the Middle East drove up the cost of oil and gas. Bills will rise by 4% again in October and are expected to leap by an eye-watering 25% in January, according to analysis by Bloomberg Economics. The Chancellor is expected to reveal how he will support households already struggling with the cost of living in his Budget next month. Responding to the figures, he said: “The war in the Middle East is impacting inflation worldwide, not just here at home. “In our bills, our weekly shop and at the petrol pumps. “We have taken early action to help families and businesses breathing space, by cutting tax on electricity bills, capping bus fares at £2 and lowering rates for pubs, social clubs and live music venues. “Despite this serious global uncertainty, our UK economy is proving resilient, and our determination to deliver growth in every postcode continues.” What it means for your money Higher inflation means that the cost of goods, services and food is rising faster. As a result, the buying power of your money falls as you can’t purchase as much with it as you could before. Meanwhile, today’s figure could mean that the Bank of England is forced to increase its base rate this year to combat soaring inflation. Inflation is well above the Bank’s target of 2%. Kevin Brown, savings expert at Scottish Friendly, said: “When prices rise faster, household budgets have less room to absorb other costs and wages do not stretch as far. “The Bank of England will take that into account ahead of its next interest rate decision tomorrow.” While the Bank is widely expected to hold interest rates at 3.75% tomorrow, it could mean that it’s forced to take faster and more aggressive action to bring them back under control. Financial markets are pricing in up to four quarter-point rate increases over the coming months and into next year. Higher interest rates makes borrowing money more expensive and could push up the cost of any loans or mortgages you have. When inflation is above the Bank’s target it’s important to make sure you are getting a good interest rate on your savings. That’s because if your interest rate is below the rate of inflation then your money is effectively losing money. Use a comparison website such as MoneyfactsCompare to shop around and get the best deal. What is the base rate and how does it affect the economy? NINE members of the Bank of England's Monetary Policy Committee meet eight times each year to set the base rate. Any change to the Bank’s rate can have wide-reaching consequences as it directly influences both: The cost that lenders charge people to borrow money The amount of savings interest banks pay out to customers. When the Bank of England lowers interest rates, consumers tend to increase spending. This can directly affect the country’s GDP and help steer the economy into growth and out of a recession. In this scenario, the cost of borrowing is usually cheap, and the biggest winners here are first-time buyers and homeowners with mortgages. But those with savings tend to lose out. However, when more credit is available to consumers, demand can increase, and prices tend to rise. And if the inflation rate rises substantially – the Bank of England might increase interest rates to bring prices back down. When the cost of borrowing rises – consumers and businesses have less money to spend, and in theory, as demand for goods and services falls, so should prices. The Bank of England is tasked with keeping inflation at 2%, and hiking interest rates is a way of trying to reach this target. In this scenario, the losers are those with debt. First-time buyers will lose out to cheaper mortgage rates, and those on tracker or standard variable rate mortgages are usually impacted by hikes to the base rate immediately. Those on a fixed-rate deal tend to be safe if they fixed when interest rates were lower – but their bills could drastically increase when it’s time to remortgage. The cost of borrowing through loans, credit cards and overdrafts also increases when the base rate rises. However, the winners in this scenario are those with money to save. Banks tend to battle it out by offering market-leading saving rates when the base rate is high. 1 comment1