Surging inflation: what can households do to ease the pressure?

The squeeze on households has tightened its grip to the strongest level in a generation.

Consumer Prices Index (CPI) inflation jumped to 5.4% in December – the highest level since March 1992.

With energy bills set to rise again sharply and a 1.25 percentage point National Insurance increase also coming in from April to help pay for the NHS and social care, the pressure on household incomes is set to bear down further.

There may be some ways for people to ease the pressure on their finances though.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “With inflation running so high, we need to be careful that rising prices don’t push us into overspending.

“By far the best way to start is by drawing up a budget and working out the most sensible places to cut back.

“Cutting costs can be as simple as shopping around for a better deal on everything from media packages to groceries and insurance.

“However, if you’ve already taken the easy steps, it might mean cutting out some of the luxuries you don’t really value.

“Checking for things lurking in your regular direct debits is a good place to start. It’s only if this doesn’t do the trick that you need to consider more difficult lifestyle changes to keep costs down.”

Households may also want to review their savings accounts to make sure they are getting the top returns.

However, the financial information website Moneyfacts.co.uk said there is not one standard cash savings account that can outpace 5.4% – meaning the value of savings pots will be eroded in real terms.

The top easy-access deal is currently from Family Building Society and pays 0.72%, Moneyfacts said.

The top one-year fixed-rate bond from Investec Bank pays 1.36%.

Rachel Springall, a finance expert at Moneyfacts.co.uk, said: “As interest rates and inflation were particularly volatile in 2021, it would be understandable if many savers feel uncomfortable committing to a lengthy fixed term.

“Instead, savers would be wise to ensure they are getting the best possible return on their cash savings account that suits their needs, and switch if they are getting a poor deal.”

Ms Coles suggested that while people will want to keep emergency savings in a pot they can easily access, those with more cash should consider the longer term.

She said: “For money you don’t need for five to 10 years or more, you can consider stock market investments.

“The value of your investments will rise and fall in the short term, but over longer periods you should be able to ride this out and your investments stand a much better chance of outstripping inflation than they would in savings accounts.”

Becky O’Connor, head of pensions and savings at Interactive Investor, said: “It’s clearly very hard for low-income households already living on the edge to manage increases in the cost of essentials such as food and energy – these are not easy areas in which to make cutbacks – particularly in a cold winter.”

She continued: “A large proportion of low-income households are pensioners. Age UK has estimated there are more than two million pensioners living in poverty in the UK.

“Those receiving the state pension will receive a 3.1% uplift in April, which is dwarfed by the current level of inflation.

“The imbalance between state pension rises and inflation rates, which are likely to rise further by April, will provoke further calls for the Government to consider a more generous uprating that properly reflects the difficulty many older people now face.

“We saw from other ONS (Office for National Statistics) figures published this week that the number of older people in work has fallen significantly during the pandemic. Finding work is no easy task when you are in your 60s – this group survive on their pension alone, which is precarious at times of rising inflation.”

Ms O’Connor continued: “It’s really important for older people who are struggling to see if there are any benefits they are eligible for that they are not currently claiming, such as Pension Credit and any other discounts targeted at their age group.

“Those with private pension pots they are trying to manage could consider allocating a higher proportion to equities to be in with a chance of beating inflation.

“Those older people who have started drawing from their pension but are still working and able to contribute to it will still benefit from tax relief on contributions up to £4,000 a year.”

Kate Smith, senior benefits expert at Citizens Advice, said: “One of the most important things to do if you’re facing tough times is to make sure you’re getting all the support you’re entitled to.

“And remember that if you’re struggling this January, Citizens Advice can help you whoever you are and whatever your problem.”