How Will Rising Interest Rates and Inflation Affect UK Consumers?

2016 was an interesting year from a financial perspective. Brexit, followed by an unexpected Trump victory in the U.S. election, all served to wreak havoc on the UK economy.

Yet despite doom and gloom predictions from the Bank of England, the economy has remained remarkably resilient. The price of the pound has fallen, but interest rates are still low and the UK manufacturing sector is stronger now than it has been for some time.

However, there are signs that inflation is on the rise and it’s likely that the Bank of England will raise interest rates before long. The question is how will rising inflation and interest rates affect you, the consumer?

UK Consumers

Interest rates and inflation have been historically low for a number of years. Interest rates were slashed in 2009 and inflation has been low since 2011. For consumers with debt, this has been a good thing.

Mortgage rates are low and if you have loans or credit cards from Secure Trust Bank, or any other UK lender, you won’t be paying too much interest. For savers and pensioners, however, low interest rates are disastrous.

Rising Inflation

Energy costs are now rising and this, in conjunction with rising inflation, has prompted the Bank of England to reconsider its policy with regard to interest rates. At the end of 2016, the BoE was expected to cut rates by a further 0.25%, but rising inflation has prompted a switch in thinking. For now, interest rates will remain at 0.25%, but this could change as we move further into 2017, and with inflation widely predicted to peak around 2.8% by 2018, there could be misery ahead for many UK consumers.

Higher Prices at the Checkouts

Inflation hit a 1.6% two-year high in December, which has already translated to higher air fares. Prices on the petrol forecourts and in supermarkets are already beginning to rise. UK businesses are under increasing pressure from a weak pound and rising costs of raw materials.

Much of what we buy is imported from abroad, so if interest rates and inflation rises, manufacturers and retailers will inevitably try to pass on their costs. They may not always get away with it, as was evidenced by the very public spat between Tesco and Unilever, aka ‘Marmite-gate’, but more often than not, price increases do slip under the radar and a weak pound is already translating to higher prices at the checkout, particularly for goods imported from abroad.

Reduced Disposable Income

Higher inflation and rising interest rates will slash disposable income for many households. For savers, the situation is even more miserable, as the majority of UK savings accounts can’t match the current rate of inflation. There is even less to be gained by saving money right now, so if you do have money stashed away, you are better off paying down your debt and reducing your exposure to high interest rates.

We don’t have a crystal ball and as yet, the future is uncertain. There is still a great deal of uncertainty surrounding Brexit and as yet, it isn’t clear whether the Bank of England will respond to rising inflation by raising interest rates, but if inflation does continue to rise, the BoE will have no choice. The message here is that if you do have significant debt, it would be wise to lock in some low fixed rate deals now rather than later.