What does a change in inflation mean for your family?

This article has been updated to reflect the latest inflation and interest rate figures.

It has been announced that the rate of inflation has fallen to 7.9% down from 8.7% in May. If you're not sure what inflation means, it is the rising cost of living over time, and – as we all know – the price of everything from keeping the fridge stocked and the radiators on has risen dramatically over the last couple of years. So what does this latest announcement mean for your family’s finances and does it suggest that the squeeze on our finances is finally easing?

Although inflation is now well down from its peak of 11.1% in October 2022, it’s important to know that the current rate means prices are still 7.9% higher than they were this time last year. Sarah Pennells, consumer finance specialist at Royal London explains: “This drop in inflation still means prices are going up, just at a slower rate than they had been previously.”

Research conducted by Royal London found that in the year to February, the average household is spending £441 a month more on bills. Rent and mortgage payments are up by an average of £208 a month and energy bills cost us £141 more each month.

She adds: ‘Rocketing prices have caused hardship for millions of people across the UK, but it’s been an especially bumpy ride for people with childcare and pet costs, who have seen their outgoings rise by 24% more than everybody else, with average bills increasing by almost £500 a month.”

Here we take a closer look at how inflation is hitting the key areas of your family spending, even though it's remained stable over the last couple of months.

1.  Food shopping 

Your weekly food shop is one area where you’ll really feel the pain of inflation. Emma-Lou Montgomery, associate director for personal investing at Fidelity International says: “Food in particular is a major concern. Anyone who’s been into a supermarket recently will know first-hand how much the cost of everyday essentials has risen.

“Households are having to cope with food costs running 19.1% higher than last year, with no sign yet that the pace of rises is about to slow significantly.

From switching to shopping at the cheapest supermarket to planning ahead, finance expert Sarah Pennells says there are plenty of ways to trim your supermarket spending. “You can also try buying the own brand and value ranges in store rather than pricier branded goods. Being savvy with meal planning should also ensure you’re only buying things you need and not ending up with food that goes to waste.”

2. Gas and electricity bills 

The cost of heating our homes has also been soaring, but there is good news. As of July a revised energy price cap came back into force. This is set lower than the old energy price cap and the energy price guarantee (which ended in June) and means the average household bill has fallen to £2,074, saving the typical family £426 a year, compared to the price guarantee level of £2,500 a year.

But Myron Jobson, senior personal finance analyst at Interactive Investor says its important families are still careful – you could still end up paying much more than £2,000 a year. “Ofgem’s price cap only limits the amount you can be charged for each unit of gas and electricity you use, not how much you can be billed in total. Your bill is linked to how much you use. But, on the plus side, it is likely with warmer weather and longer days ahead, we will all be using less energy.”

3. Fuel

On a more positive note, the cost of keeping our cars going is at least falling. Fuel prices have been slowly reducing for almost a year now, with petrol close to 10% cheaper than this time last year and diesel nearly 8% down.

This isn’t just good news because we’re paying less to fill up our cars. Fuel is a significant cost for huge swathes of businesses from big supermarkets to your local taxi firm, so when fuel prices rose, businesses had little choice but to pass those price increases on to their customers by raising their prices. However, cheaper petrol costs should, in time, start to drive down costs in other areas too.

4. Mortgages

If you have a mortgage, you'll also be impacted by inflation. One of the key tools the Bank of England has to control rampant inflation is interest rates. 

Raising interest rates increases the cost of borrowing but makes saving more attractive. The idea is that by increasing interest rates (and making our mortgage payments go up) we’ll all spend less, making it harder for companies to increase their prices. Those with spare cash might be more tempted to save it too – with savings accounts paying higher interest rates.

That explains why interest rates have been rocketing recently – from 0.1% in December 2021 to a current rate of 5% and experts are predicting they could reach 5.5% before the year is out.

This means mortgage costs will inevitably go up for both buyers and existing homeowners as they come to the end of cheaper fixed-rate deals.

But Sarah Pennells says that if you take the time to plan and are able to seek out the best deals there are ways to limit the damage. “If you’re looking to buy or remortgage, it’s worth contacting a mortgage broker. They can look across the market and can recommend the right deal for your circumstances.”

“For those remortgaging, many lenders will let you secure a rate around six months in advance of the end of a current mortgage deal. This ensures you have a new product in place and avoids moving on to a lender’s standard variable rate (SVR), often their most expensive rate.”

There had been calls for the government to offer financial assistance to those struggling with rising mortgage payments, but Chancellor Jeremy Hunt has ruled this out, saying that a relief scheme like this would make inflation worse and not better. 

5.  Rent 

It’s not only homeowners that are seeing their housing costs go up – in the year to April average rents rose by 4.8%, according to a report by the Office of National Statistics.

Royal London's Sarah Pennells says: “Renters are ultimately are as affected by rising interest rates as homeowners. Many landlords with a mortgage pass on rising interest rate costs. Added demand pressures in the rental space is also leading to hikes to rental rates."

But unfortunately renters are less able to manage rising rents - you can only challenge an increase if it’s unfair, which wouldn’t apply if a landlord is dealing with increased mortgage payments.This means many renters will be faced with the difficult choice of moving somewhere more affordable or cutting costs in other areas.

Don't forget that low-income households and those who receive certain benefits will be entitled to more cost of living payments over the next few months. A payment was made in May 2023, with another one due in autumn 2023 and a final one in spring 2024. At the time of writing, the assessment period and payment dates have not been confirmed for these next payments, but the money could be used to help cushion the blow of rising rents. 

If inflation is making it hard for you to make ends meet, check out our tips on how to save money and how to make extra money to see how you might be able to ease the pressure on your finances.