UK Inflation rose unexpectedly from 1.3% in December to 1.8% in January - the highest for six-months.

The price of gas, fuel and electricity were the main contributors to the jump in the Consumer Price Index (CPI) according to the Office for National Statistics (ONS).

The surprise increase puts the inflation rate much closer to the Bank of England’s target rate of 2% and endorses the decision made by the Bank’s Monetary Policy Committee in January to hold rates at 0.75%.

Markets were speculating a potential cut to interest rates this year based on falling inflation, but for now this gives the Bank’s new Governor Andrew Bailey - who takes over the reins from Mark Carney on 16 March - some breathing space.

Inflation - the increase in the prices of goods and services - can be both a friend and foe. It all depends on how much you have of it and whether you’re a saver or spender. A little inflation is a good thing. It’s a sign of an improving economy and it means that your debts - providing your income rises in line or above the rate of inflation - will reduce over time in real terms. Those that bought a house in the 1970s will know first-hand how the value of their mortgage debt decreased in real terms as their wages increased. Governments also welcome some inflation as they see the value of their borrowing reduce too.

Wages in the UK have also been increasing. The latest wages data released by the ONS on Tuesday showed that average weekly wages in the UK reached their highest levels since before the financial crisis, helping to ease a 12-year squeeze on cash-strapped households. News this week that the number of people in work in the UK is at its highest level since records began, could suggest further wage growth as the pool of talent looking for work becomes smaller. 

However, it’s worth noting the pace of wage growth has slowed down. According to the ONS, in the three months to December, annual growth in average weekly earnings slowed to 2.9% for total pay, which includes bonuses, down from 3.7% in the previous quarter.

It’s a different story for savers, or those on a fixed income, who experience prices rising faster than their income. If you’re in that situation, it’s worth remembering that when inflation rises, especially over the Bank of England’s preferred rate of 2%, the main tool the Bank has to dampen down inflation is to raise interest rates.

With interest rates currently at 0.75%, well below the rate of inflation, one of the biggest risks for savers is not taking enough risk, as people’s savings are unable to keep pace with the rising cost of goods and services. Those with time on their side, may want to consider venturing further up the risk scale towards the stock market.

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