Inflation worries? 3 tips to help with the rising cost of living

UK inflation is continuing to accelerate. So if you’re struggling with the rising cost of living, here are three tips to lessen the impact on your wallet.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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The latest Consumer Price Index (CPI) shows that inflation is now running at 5.4%. This figure is the highest the UK has seen for 30 years and paints a bleak picture for those already struggling with the rising cost of living. 

So if you’re feeling the pinch, it’s worth understanding that there are steps you can take to lessen the impact on your wallet. Here’s what you need to know.

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What’s the current situation with inflation in the UK?

The UK’s inflation rate rocketed in the second half of 2021. In August, the CPI stood at 3.2%, comfortably above the government’s 2% annual inflation target. By September, it had decreased slightly to 3.1%, before skyrocketing to 4.2% by October and 5.1% by November.

The latest December 2021 figure shows that prices are now rising by a whopping 5.4% year on year.

Rising inflation is bad news as it means the value of money is shrinking. This could be a big problem if you don’t secure a pay rise at least in line with inflation. 

What’s driving the UK’s high inflation rate?

According to the ONS, rising prices of food, non-alcoholic beverages, restaurants and hotels had the biggest upward contribution to its latest inflationary report.

The ONS also reported that rising costs of furniture, household goods and clothing were other big contributors.

While these are all important factors, it’s also worth looking at the bigger picture when it comes to understanding the reasons behind the UK’s rising inflation rate.

For example, to date, the Bank of England has bought £875 billion worth of UK government bonds. This process of ‘quantitative easing‘ – also known as ‘printing money’ – was undertaken to support the economy during the first waves of the pandemic. While the benefits of QE are debatable, increasing the UK’s money supply has undoubtedly had an impact on the UK’s high inflation rate.

On a similar note, the Bank of England’s base rate was just 0.1% for most of 2021. This too is likely to have contributed to the high inflation we are experiencing today.

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How can you lessen the impact of rising prices?

National Insurance and share dividend tax will both rise later this year. That’s because National Insurance will increase by 1.25p in the pound from April, while share dividend tax will increase 1.25%.

Energy costs will go up too. That’s because Ofgem’s energy price cap will likely skyrocket when it is next reviewed in April. Currently, the price cap limits what energy suppliers can charge customers, and this is currently lower than the wholesale cost of energy.

Aside from these rises, it’s also possible that general inflation will continue to accelerate throughout 2022. While some rising costs are unavoidable, the following three tips can help to shield your finances.

1. Ensure you get the highest interest rate on your savings

It’s a fact that savings rates don’t pay anything close to the current rate of inflation. Yet some interest is better than nothing (or the 0.01% shamelessly offered by some big-name banks).

Right now, you can earn 0.72% AER variable in an easy access savings account. Or, if you’re happy to lock away cash, you can earn up to 2.1% in a fixed savings account.

2. Keep a close eye on your energy provider

Wholesale energy costs have soared over the past few months, and some analysts expect the government’s price cap to increase by over 50% in April.

While ‘do nothing’ has been a popular strategy, given that default tariffs are limited by the price cap, some providers are now offering customers the opportunity to fix costs.

While prices on these fixed deals are higher than current costs, if energy continues to rise after the price cap is raised, then it’s possible that customers could be better off in the long term by fixing now.

As a rule of thumb, if you’re offered a fixed deal that’s no more than 35% more expensive than your current price-capped tariff, you should consider switching. In other words, do the sums and weigh up the risks.

3. Be smart with share dividend tax

Share dividend tax will increase by 1.25% from April. Yet if you’re smart, you can avoid this tax. That’s because it doesn’t apply to investments held within a Stocks and Shares ISA.

For more on this, see our article that explains how to avoid the share dividend tax.

Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

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