Since the onset of the Covid-19 pandemic, inflation has been a consistent concern for UK households.
According to a survey from YouGov, 40% of Brits said they have had to make cuts to their usual spending and expect to make further reductions in the future.
Luckily, inflation has eased from the pandemic highs, so it hasn’t dominated the headlines as much recently.
That said, inflation is starting to increase again and it’s important to be aware of how this might affect your financial plan.
Inflation increased rapidly during the pandemic before falling back below the Bank of England target of 2%
Prior to the pandemic, inflation was very low, and you may not have been as concerned about rising living costs.
In fact, the Office for National Statistics (ONS) reports that inflation was just 0.2% in August 2020.
However, from early 2021, supply chain issues caused by the pandemic led to rising costs for many goods. After the Russian invasion of Ukraine in early 2022, energy costs increased significantly, leading to an even larger spike in inflation.
According to the ONS, inflation reached 11.1% in October 2022.
This was significantly higher than the Bank of England’s (BoE) target of 2% and illustrated a serious cost of living crisis in the UK, with most households noticing a measurable difference in their outgoings.
To control inflation, the BoE increased its base rate – the interest rate it charges to other financial institutions. In turn, banks and building societies increased the interest they charged on mortgages and other loans, while also offering higher interest rates on savings.
Essentially, this meant households had less disposable income as they faced higher mortgage or loan repayments. Saving was also more attractive as interest rates were higher.
As a result, consumers spent less and price rises slowed, bringing the rate of inflation down.
This strategy had the intended effect and inflation did fall. Figures from the ONS show that it finally reached the BoE target of 2% in May 2024.
Inflation was 3.8% in the 12 months to August 2025
While inflation has come down significantly since the days of the pandemic, the cost of living crisis hasn’t disappeared.
In fact, since falling below the BoE target in 2024, inflation has started rising again and the ONS reported that it was 3.8% in the 12 months to August 2025.
While this may not seem as alarming as the exceptionally high rates we saw back in 2022, persistent inflation could affect your financial plan in several ways.
3 ways rising inflation could affect your finances
1. Your outgoings will likely continue increasing
Perhaps the most direct effect of inflation is that your outgoings will likely continue increasing. As food prices and energy costs remain high, for example, your necessary spending might increase. This may make it more difficult to set aside wealth for the future.
It’s also worth noting that even when inflation is falling, the cost of goods and services doesn’t go down. It simply means that the pace at which prices increase slows.
Additionally, the BoE sees a low level of inflation as an important part of a healthy economy, which is why they set the target at 2%.
So, you’ll likely still need to factor rising prices into your budget in the future, especially if your earnings don’t increase at the same rate as inflation.
2. Inflation could erode the spending power of your savings in the future
On paper, wealth in a savings account achieves steady growth over time as you generate interest. However, it’s important to consider the effects of inflation on your savings and how this might erode the spending power of your wealth in the future.
For example, imagine you put £10,000 in a savings account with an interest rate of 2% a year ago. You would now have £10,200.
But if inflation was 3%, it would cost you £10,300 to buy what £10,000 would have bought a year before.
So, despite earning interest, your money buys less than it did a year ago.
Of course, if the interest rate on your savings account is higher than the rate of inflation, your savings won’t necessarily lose value. However, inflation could still mean that your wealth isn’t growing as fast as you might think.
That’s why, although it’s useful to keep some cash as an emergency fund or to save for short- to medium-term goals, it’s important to consider alternatives. Investing your wealth could mean you’re more likely to see inflation-beating returns, and we can support you with this.
3. There is much uncertainty around changing interest rates
As the BoE increased its base rate several times in the past few years, it might’ve been easier to find a favourable interest rate on your savings.
However, you may also have faced higher repayments on your mortgage or other loans. Either way, fluctuations in interest rates have a significant effect on your financial plan.
Since inflation started coming down, the BoE has reduced the base rate several times.
Somewhat surprisingly, the base rate fell from 4.25% to 4% in August 2025 even though inflation had started to increase again.
This was a departure from the previous policy of maintaining or increasing the base rate while inflation remained above 2%.
So, there is much uncertainty around interest rates and how they might change as the BoE tries to carefully manage inflation. That’s why you need to remain proactive and adjust your financial plan as interest rates fluctuate.
Get in touch
We can help you understand and adapt to the various effects of inflation on your financial plan.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) 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.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.