UK inflation jumps to 10-month high in January

While experts predicted inflation would rise, the increase of 3% was larger than many expected.

After falling to 2.5% in December, today the Office for National Statistics (ONS) announced that UK inflation rose significantly to 3% in January.

This is the highest the rate of inflation has been since March 2024, and is now considerably above the Bank of England’s target of 2%.

As a simple guide, it means that goods that cost £1 in January 2024 have risen by 3p to now cost £1.03.

Inflation was widely expected to increase this year due to rising energy and utility bills, for example, but January’s figure may cause concerns that inflation will increase and remain at an even higher level throughout 2025.

This is likely to be a particular blow for those wanting to take out a mortgage as higher inflation could make the Bank of England’s Monetary Policy Committee (MPC) more reluctant to drop the central interest rate in its upcoming meetings. In turn, this could mean that mortgage rates will be slower to fall, although lenders consider many other factors when setting their rates.

Fees, food and flights fuel inflation hike

Several areas contributed to this larger-than-expected rise in inflation, including education costs. This sector saw prices rise by 2.4% between December and January, with private school fees rocketing up by 12.7%. Part of the reason for this rise is likely to be because, from the start of the year, private schools have no longer received a tax exemption and are now charged VAT at the standard rate of 20%.

Also helping to push up the overall inflation rate were food and non-alcoholic drinks, which increased by 3.3% year-on-year in January, compared to 2.0% in December. Meat, bread and cereals were some of the foodstuffs that saw particularly noticeable increases in price.

Transport costs, including air fares and fuel, were another contributing factor as they rose by 1.7% in the year to January compared to an annual fall of 0.6% in December. Even though the price of air fares fell between December and January (which is what typically happens), the monthly drop was much lower than usual at just 19.0% compared to the much larger fall of 38.9% one year ago.

What does this mean for savers?

Across the board there has been an array of rate movements, with top rate reductions taking centre stage. However, they also showcased some resilience, and a few increases made an appearance. Challenger banks currently occupy all the top spots in the market as they are working hard to attract new business.

Short-term fixed bonds continue to take a downward trajectory; savers could now be earning up to £56 less in real returns compared to this time last year. To maximise their savings, consumers would be wise to carefully consider stashing away their cash for a longer term to receive a guaranteed return and outpace fixed bond rates tumbling further, but they should ensure that they are not in danger of breaching their Personal Savings Allowance (PSA).

Unsurprisingly, the chart-topping easy access rate has been slashed, witnessing the largest drop month-on-month by 0.19%. Comparatively, its ISA equivalent has so far won out against any cuts, holding firm at 5% gross. This may be much more enticing for savers wanting to receive real cash returns and benefit from some tax-free savings. Typically, we would also expect ISA providers to be improving their rates around this time of year in the lead-up to ISA season which could further benefit those tax-savvy savers.

Inflation is predicted to rise to around 3.0% by Q1 2026 and, if rates were to remain at their current level, savers would be earning just over 1% in interest across ISAs and non-ISAs after accounting for the power of inflation. With market-leading rates falling across the board, earning a fair return may become a pressing issue, so it is key that savers review their current rate and make the switch if it is not working to its fullest potential.