UK inflation hit a thirty year high in February with the Consumer Price Index (CPI) hitting 6.2% in the 12 months to February. Primary drivers of the rise are fuel, energy and food costs surged. Nor are things set to improve anytime soon, the Bank of England has warned inflation may reach 8% and possibly higher, in the coming months.
With inflation meaning the pound in our pocket will buy less than a year ago, the Bank of England has increased the Bank Rate (sometimes called the ‘Bank of England base rate’ or even just ‘the interest rate’) for the third time in four months to 0.75%.
For the millennial and Gen Z generations, rapidly rising inflation, its impact on interest rates and the cost of living, will be something the vast majority will have never experienced in their working lives. For all too many it will be painful and it will necessitate an uncomfortable level of additional budgetary control.
Increasing interest rates is the Bank of England’s primary tool to address rising inflation. It is designed to restrict peoples’ spending power.
Bank Rate influences the rates lenders charge people to borrow money or pay on their savings. If this is all new to you and with the caveat that the following assessment is only at a very high level and it does construe advice, here is what rising inflation and Bank Rate are likely to mean.