Why your money could buy less next year, and what you can do about it

4.9%. That’s where the Bank of England thinks inflation will be by next spring, up from 3.5% now. It’s one of those numbers that sounds dry until you realise it decides whether your wages, your savings and your pension are really growing, or shrinking without you noticing. Here’s what it means for you.

What inflation actually is

Inflation is how fast prices are rising. If inflation is 4.9%, something that cost £100 a year ago now costs about £104.90.

The official figure is calculated by the Office for National Statistics, which tracks the prices of a big basket of everyday things, from food and fuel to rent and haircuts. In September, prices were 3.5% higher than a year earlier. The next figure comes out on 18 November.

The main reason inflation is rising again is energy. Gas and oil prices have jumped since the conflict in the Middle East began, and that feeds through into everything from heating bills to the cost of transporting food.

To try to slow it down, the Bank of England raised interest rates to 4% last week, the first rise in more than three years. Higher interest rates make borrowing more expensive, which tends to cool spending and, over time, bring price rises down.

Who’s affected, and what it means

Savers. If your savings earn less interest than the rate of inflation, your money is losing buying power. Say you have £10,000 earning 3% and prices rise by 4.9%. After a year you’d have £10,300, but it would only buy what about £9,820 buys today. You’d be roughly £180 worse off in real terms, even though your balance went up. And from April 2027, tax on savings interest outside an ISA rises to 24% for basic-rate taxpayers.

Pensioners. The full new State Pension rises by 3.9% next April. If inflation is close to 4.9% by then, that rise won’t keep up with prices for a while. Anyone with a private pension or annuity that doesn’t rise with inflation will feel it even more.

Workers. If your pay rise is smaller than inflation, you’ve effectively had a pay cut, because your wages buy less than they did. The National Living Wage goes up to £13.21 an hour from April 2027.

Homeowners with a mortgage. If you’re on a tracker mortgage, which moves with the Bank of England’s rate, last week’s rise will cost the average borrower about £31 more a month. Fixed-rate deals have already gone up: the average two-year fix is now close to 6%, up from under 5% a year ago.

Renters. Average private rents in the UK reached £1,406 a month in September, 3.8% higher than a year earlier.

What you can do

• Check your savings rate against inflation. If your account pays well below 3.5%, look at whether you could move it somewhere better. Higher interest rates mean better deals should be around.
• Use your ISA allowance. You can put up to £20,000 a year into ISAs, and the interest is tax-free. With savings tax going up, this matters more than ever.
• Know what’s coming in and going out. Energy bills are also forecast to rise in January. A simple monthly budget makes it much easier to spot where you can make room.
• Remortgaging soon? Start early. Many lenders let you secure a new deal months before your current one ends. It’s worth knowing your options well ahead of time.
• Pensioners on a low income: check Pension Credit. It tops up low incomes and can unlock other help, such as with council tax and heating costs. Many people who qualify never claim it.
• Think long term with investments. Over long periods, shares have historically grown faster than inflation, although there are no guarantees and their value can fall. Cash is important for emergencies and short-term goals, but it can struggle to keep up with rising prices over many years.

My opinion

In my view, this is the squeeze in a nutshell. The Bank of England is raising interest rates to bring inflation down, which helps savers but hurts borrowers. Meanwhile, the government is raising tax on savings interest just as savers finally start earning a decent return. If you have a mortgage and savings, you could find yourself paying more on one and keeping less on the other.

This article is for educational purposes only and is not financial advice. Inflation forecasts can change. The value of investments can go down as well as up. To see how rising costs affect your budget, try our free financial dashboard. For help with your wider finances, speak to a regulated financial adviser.


Sources

• Interest rates rise to 4%: what it means for your money, The Penny Pincher
• Bank of England raises Base Rate to 4%, Tembo
• Live: Bank of England raises interest rates, MoneyWeek
• UK inflation: what is the current rate, Be Clever With Your Cash
• ONS figures on September 2026 inflation and rents, via AOL
• Autumn Budget 2026: what was announced, Richify