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While we are still all living in a cost of living crisis in the UK, which last year saw inflation soar at its fastest rate in nearly 10 years. Inflation – the rate at which prices increase - reached 11.1% in October 2022, a 41-year high, before easing in subsequent months. It was 6.8% in July 2023, down from 7.9% in June, according to the Office for National Statistics.

However, the current rate is still three times the Bank of England's target of 2%, which was set by the UK government.

If you're unsure what it all means, we've put together a comprehensive guide on inflation - what it means and how inflation impacts you and your money.

Inflation is the increase in the price of something over time.

Inflation measures how much prices have gone up daily, monthly or yearly. It can also be used to compare the prices of things decades or centuries ago – the Bank of England has an inflation calculator which goes back to 1209 when King John ruled England.

For example: If a bottle of milk costs £1 but £1.05 a year later, then annual milk inflation is 5%.

The Office for National Statistics (ONS) keeps tabs on the rate of inflation in the UK and tracks the prices of hundreds of everyday items in an imaginary “basket of goods” on items we're likely to be spending our money on.

It publishes regular updates showing how much things have increased or decreased. For example, if the rate of inflation is 4% a year, then you could estimate that a bottle of milk that cost £1 in January 2022 would set you back £1.04 by January 2023.

From these items, they work out the Consumer Price Index, which basically measures the average change in price for goods and services, such as fuel, eating-out, and getting your nails done.

The UK’s rate of inflation has been rising over the past few years, after being at historic low levels over the past two decades. From 2.1% in May 2021, it's more than quadrupled to 40-year highs of 11.1% in October 2022 this year. Since then it's been sliding lower, dropping to 10.1% by January 2023 and to 6.8% in July 2023. However, inflation has actually been higher in the past. In 1975, it was a whopping 24.2%.

The current rising inflation rates in the UK mainly come down to a few key events. Soaring food and energy bills have helped drive inflation up. Oil and gas were in greater demand as life got back to normal after the pandemic. At the same time, the war in Ukraine meant less was available from Russia, putting further pressure on prices. The war also reduced the amount of grain available, pushing up global food prices.

All of this has pushed the cost of living up so dramatically that many people have been forced to work longer hours to earn extra money or move home to cut down on bills.

Citizens Advice have advised that "the warning lights could not be flashing brighter" for the government to issue more support for households than they are now and debt charities are urging those finding it difficult to pay bills to seek help earlier rather than later in the year.

“There are desperate stories behind these figures. People washing in their kitchen sinks because they can't afford a hot shower; parents skipping meals to feed their kids; disabled people who can't afford to use vital equipment because of soaring energy bills,” Dame Clare Moriarty, chief executive of Citizens Advice told the BBC.

The Bank of England has a target to keep inflation at 2%, but the current rate is, as mentioned, three times above that. The traditional response to rising inflation is to put up interest rates - we know, ideal, right? The thinking behind it is that it makes borrowing more expensive and so people have less money to spend and therefore buy fewer things, reducing the demand for goods and in turn, actually slowing price rises and reversing the high inflation rates.

However, since everyone has less money including businesses, who cannot afford to borrow, they then make job cuts. No one is a winner here.

In June 2023, the Bank increased interest rates for the 14th time in a row, taking the main rate to 5.25%. Not good news for anyone, especially homeowners on tracker mortgages who have seen their monthly repayments almost double.

Understandably, people are concerned about what this means for their finances. I mean, isn't budgeting tough enough as it is without having to account for growing rates of inflation? GLAMOUR spoke to Makala Green, a financial expert from Green Wealth Planning Limited, to find out how this might affect you and – more importantly – what you can do about it.

According to Makala, “Rising inflation is bad news for savers when interest rates are low - it means the value of your money decreases, reducing the buying power. However, if the Bank of England raises rates, this could be good news for savers as interest rates will likely increase.”

She adds, "The State Pension increases in line with inflation CPI (above wage growth or 2.5%), so increased inflation could mean more money provided in retirement, although the government has hinted they might cut this link as part of the triple lock.

“Some private pensions are linked with inflation, meaning the monthly amount you pay could increase. You have the option to make level payments that will remain the same if increases are not affordable.”

Here are Makala's top tips for protecting your finances:

Stay alert: keep up with inflation news; there is still a lot of speculation and we remain unsure how inflation will impact us in future. Keep a watchful eye on price hikes such as airfare, holidays, hotels, cars, car rentals, computers, and food, just to name a few. The changes in the costs of goods and services may cause you to change your mind.

Plan ahead: rising prices are not only due to inflation increases; it also factors in supply shortages. So, plan purchases in advance to avoid overspending and reduce waiting times.

Future proof your finances: take an educated guess and project your assumptions. Try doing some what-if scenarios, for example, a 2% or 3% increase on all spending. So, if you spend £2,000, that would be £2,040 (2%) or £2,060 (3%).

Keep savings accessible: Avoid locking your money away in a savings account for too long. You want to be able to take advantage of higher interest rates if they arise.

Fasten fixed rates borrowing: Borrowing is at an all-time low, but this may change in future, so get in there while it’s hot you may want to review your mortgage deal or consolidate debts to reduce interest.

Consider investing: If you are in a position to invest, you could potentially protect money against inflation as returns tend to be higher over the long term. However, your capital is at risk, and you could lose money. Diversifying your investments can be a great way to help reduce risk.

Plan don’t panic: Don't give yourself a hard time. Managing money is complicated for most, not to mention the added pressure of inflation. Take a moment to review your finances and see where you can make constructive changes.

Follow Makala Green on Instagram at @TheWealthCheck and check out her website www.makalagreen.com

For more from Glamour UK's Lucy Morgan, follow her on Instagram @lucyalexxandra.

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