Inflation rose to 3.4 per cent in the year to December, according to figures published by the Office for National Statistics (ONS) on Wednesday.
The Consumer Prices Index (CPI) remains well above the Bank of England’s 2 per cent target and has risen from the previous reading of 3.2 per cent.
Most economists had expected a rise, and a reduction is expected in the coming months.
What will happen to inflation in the future?
Most experts expect inflation to fall throughout the course of the year.
Deutsche Bank Research predicts that the rate of price rises will fall to near target by spring.
Sanjay Raja, Deutsche Bank’s chief UK economist, said: “Inflation looks set to drop meaningfully – even reaching near [the 2 per cent] target by spring, boosting real disposable incomes.”
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Forecaster Capital Economics said the rate should drop to 3.1 per cent in the next reading and the Bank of England’s 2 per cent target by April.
What does changing inflation mean for interest rates?
When inflation stays high, prices rise more quickly, increasing the likelihood that the Bank will keep interest rates elevated for longer.
The Bank of England tends to cut rates when inflation is at or close to target, as higher rates are used to suppress price rises.
There is debate over how many more interest rate cuts will be seen in 2026. The base rate currently sits at 3.75 per cent.
However, there is expected to be at least one by the middle of the year, although much will depend on upcoming economic data.
What does this mean for mortgages?
While mortgages are not directly determined by inflation, many products are influenced by the Bank’s base rate, which in turn is shaped by inflation.
Tracker mortgages and standard variable rates move directly with interest rate changes, while fixed-rate deals tend to follow swap rates, which reflect long-term expectations for the base rate.
Mortgage rates are broadly expected to fall throughout 2026 with many lenders already making cuts to rates in January.
The lowest priced deal on the market is currently a two-year fix from Lloyds priced at 3.45 per cent, though it requires borrowers to have a 40 per cent deposit and a Club Lloyds bank account.
HSBC, Barclays, Halifax and other smaller lenders have also made reductions.
If the Bank cuts interest rates further this year, mortgage lenders will likely make further cuts.
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What does it mean for savings?
High inflation is bad news for savers as it erodes the value of money held in the bank.
The effects of inflation on the Bank’s interest rate also impact savers, because of the base rate’s influence on savings rates. Savings rates have dropped in recent months, though it is possible to bag a deal that beats inflation.
For example, Chase pays 4.5 per cent to new customers, with a one-year 2 per cent fixed bonus on top of its 2.5 per cent variable rate. This is app-only and you only need to deposit £1.
Savers are encouraged to shop around to find a deal that works for them, especially if they have left their money in a low interest rate for some time.
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