What inflation means for your pocket

The consumer price index was up by 3.3% year-on-year in March, compared to 3% in February, as the UK begins to see the effects of the US-Iran war in prices.

At this stage, inflation is fairly lumpy, with the pain felt most keenly at the pumps and for those using oil to heat their homes. However, over the coming months we can expect it to spread to the supermarket, the high street, our energy bills and beyond. In the interim, it’s a good idea to work some wiggle room into your finances, before you find yourself running out of money at the end of the month or forced to plan on the fly.

The average price of petrol rose by 8.6 pence per litre in a month to 140.2 pence per litre, the highest price since August 2024. Meanwhile diesel prices rose by 17.6 pence per litre to 158.7 pence per litre, the highest since November 2023. The price of domestic heating oil also spiked when the Iran war started, up an astonishing 95.3% in a year – the highest since September 2022.

Air fares also climbed 10% in a month. However, the figures were collected before the outbreak of war in the Middle East, and the rise came mainly from the timing of the collection, which fell on the Tuesday after Easter this year, affecting the price of long haul flights.

Food prices will be one to watch in the months to come, with food and non-alcoholic drink prices up 3.7% in a year – from 3.3% a month earlier. These were powered by longer-term issues, increasing the price of chocolate, meat, fish and soft drinks, but if oil prices remain higher, we can expect it to start to affect the rest of the basket too.

What it means for graduates

The March inflation data is key for graduates with student loans, because the RPI figure is used to set the interest rate for the year starting in September. This has come in at 4.1%, up from 3.6% a month earlier, which is miserable news for graduates who’ll end up with higher loan balances through no fault of their own.

The controversial Plan 2 rate has been capped at 6%, which protects graduates from rates that would otherwise have been as high as 7.1% (RPI plus 3%). However, not all graduates are protected. Those in the newer Plan 5 student loan, and those on Plan 2 who earn below the lower repayment threshold face interest at RPI – or 4.1%. Those on Plan 2 who earn above the lower repayment threshold and below the higher one will have their rate calculated between RPI and the cap. Ironically, it’s only higher earners who get full protection from the rate cap.

What it means for your savings and mortgages

Inflation plays a role in both savings and mortgages, because it tends to raise rate expectations, which pushes up the gilt yields that are used to price both. However, right now, inflation is only part of a picture that has been dominated in recent days by politics. Gilt yields soared on Monday night this week, as a result of both domestic and international dramas.

If these remain elevated, it could be bad news for anyone on the hunt for a mortgage, as rates could rise. The mortgage market tends to react fairly quickly to changes like this, so anyone in the market for a remortgage may want to take this into account before the best rates disappear.

Savers, meanwhile, are likely to see some strong rates, and the best fixed rate accounts could nudge up again. This isn’t necessarily the peak, but it’s notoriously difficult to spot exactly the right moment to fix until it has passed, so if you’re in the market for a fixed rate deal, it makes sense to shop around for the best rate on the market right now instead of trying to second-guess the latest twists and turns in every political drama.

For existing savers, the fact that higher inflation is likely to be on the way will make it vital to revisit your savings. The most competitive deals on the market are way ahead of inflation, but banks tend to gradually reduce competitive rates over time. They know savers are sticky, so they can keep cutting the rates without scaring them off. It means it’s worth checking what you’re making on each of your accounts and shopping around for better deals, so you stand a better chance of staying ahead of inflation.

In this environment, it’s also worth considering investment. If you have some cash that you won’t need for five to ten years or more, investing that money should be on the radar. Over the short term it will rise and fall in value with the markets, but over the long term it stands a better chance of hanging onto its buying power and beating inflation than savings.