The UK inflation rate unexpectedly fell to 2.5% last month, despite most analysts predicting it would remain at 2.6%. The drop was largely attributed to a smaller-than-usual rise in hotel and airfare costs.
It follows a two-month period of growth and brings the base rate closer in line with the Bank of England’s 2% target. It also marks a stark contrast from October 2022 when inflation hit a 40-year high of 11.1% due to a combination of supply chain issues, rising energy prices, and subsequent COVID lockdowns.
But while the news provided some much-needed relief for consumers grappling with exorbitant food and energy prices, those relying on benefits won’t benefit quite as much. So how are inflation and benefits linked? And what does this mean for your monthly payments? We’ve outlined what the latest inflation figure means for your benefits here:
How does inflation work?
Inflation is the measure of how the price of goods and services in an economy increases year-on-year. For example, if the UK inflation rate is 2%, it means a basket of shopping that cost £100 this time last year would cost £102 today. When the inflation rate drops, it essentially means the price of items is increasing at a slower pace, which is good news for both the economy and consumers.
In the UK, inflation and interest rates have an inverse relationship. In other words, when inflation is high, interest rates tend to rise, and when inflation is low, interest rates typically fall. The latest inflation rate drop has thus paved the way for a potential interest rate cut next month, which would reduce borrowing costs for millions.
How does inflation impact benefits?
The government increases universal credit payments each April, basing it on the previous September’s Consumer Price Index (CPI). This means that, based on last year’s CPI of 1.7%, universal credit payments are on track to increase by 1.7% this year.
However, this adjustment doesn’t take any subsequent inflation rate changes into account. So, even though inflation has dropped to 2.5%, this is still higher than the 1.7% benefit increase, meaning those in receipt of universal credit won’t benefit from the drop. What’s more, experts are predicting further inflation increases in the coming months, which would only add to the pressure already being felt by those on benefits.
How else can a drop in inflation affect your money?
The 0.1% drop in inflation should be good news for homeowners on variable mortgages as a fall in interest rates usually follows as central banks reduce their interest rates in an attempt to encourage borrowing. However, mortgage rates are still on track to increase due to the worsening economy and are only likely to experience a small upturn if anything, experts have warned.
The good news is, lower inflation should result in slight wage growth and more affordable living costs across the board as the purchasing power of the pound increases. Furthermore, if interest rates sink as expected, this should translate to better savings deals as experts warn people to lock in current rates before they fall.
There might not be anything any of us can do about inflation, but we are in control of our own financial future. If you’re struggling with rising bills and need help to manage your debt, don’t hesitate to reach out for free advice from an expert.
