Lessons from rising inflation and interest rates

As 2021 drew to a close, inflation finally forced the Bank of England’s hand. What will higher rates mean for you?



Source: ONS

The November inflation figures, released in mid-December, once again exceeded the Bank of England’s (BoE) expectations. At the start of November, the BoE had said that CPI inflation was “expected to peak at around 5% in April 2022”. Six weeks later it changed its tune: “Bank staff expect inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022”.

What does that mean for you?

  • The effects on your personal spending will fluctuate. Inflation is not constant across all goods and services. For example, November’s data showed that while overall inflation was 5.1% a year, in the health category prices rose only 1.4% across the 12 months, while for transport (for example those petrol prices and secondhand cars) the annual increase was 12.5%.
  • The buying power of your cash savings is depreciating fast. The Bank responded to the latest jump in inflation by raising Bank Rate from 0.1% to 0.25%. Viewed another way, over a year a deposit of £1,000 would earn £2.50 (before tax) in interest at Base Rate, while current inflation would erode its buying power by about £50.
  • Your next pay rise probably won’t cover the erosion of buying power. The Bank’s forecast of an April peak for inflation – primarily driven by the next Office of Gas and Electricity Markets (OFGEM) utility price cap rise – will coincide with the increase in National Insurance contributions announced last September. For example, if you earn £40,000 a year and, like many employees, your salary review takes effect in April, you will need a pay rise of 8.2% to maintain the buying power you had a year ago.
  • Your insurance cover will need a review. If you have life assurance and/or income protection that is not inflation-proofed, then you will need to increase the level of cover to maintain the real value of your protection. With buildings and contents insurance, that often happens automatically and goes unnoticed.
  • Any inheritance tax (IHT) liability on your estate has probably gone up. The current Chancellor has followed in the footsteps of his predecessors by freezing the IHT nil rate band. As inflation drives up asset values, such as your home, that could mean more of your estate is exposed to 40% tax.

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Tax laws can change. The Financial Conduct Authority does not regulate tax or benefit advice.

Important Information

This document is marketing material. This document is provided by the author and may not necessarily represent views expressed in other Aspect8 communications, strategies or funds. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. The sectors, securities, regions and countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Aspect8 does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Aspect8 has to its customers under any regulatory system. MSCI: Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purposes without the data provider’s consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the document shall have no liability in connection with the third party data. FTSE: FTSE International Limited (‘FTSE’) © FTSE 2019. ‘FTSE®’ is a trade mark of London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited under licence. All rights in the FTSE indices and or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. This content is issued by Aspect8 Limited, Holmwood House, Broadlands Business Campus, Langhurstwood Road, Horsham, West Sussex, RH12 4QP. Registered No. 07572431. Authorised and regulated by the Financial Conduct Authority.


Benchmark Financial Planning is an Appointed Representative of Best Practice IFA Group Limited which is authorised and regulated by the Financial Conduct Authority, the registration number is 223112. Registered office: Broadlands Business Campus, Langhurst Wood Road, Horsham, West Sussex, RH12 4QP. Registered in England and Wales No 07572431.

The Financial Ombudsman Service is available to sort out individual complaints that clients and financial services businesses aren't able to resolve themselves. To contact the Financial Ombudsman Service, please visit www.financial-ombudsman.org.uk

The guidance and/or advice contained within this website are subject to the UK regulatory regime and are therefore targeted at consumers based in the UK.