Inflation and interest rates are interconnected, with the Bank of England (BoE) using interest rates as a tool for controlling inflation.
Having slowly started to decrease in the early part of 2025, inflation rates took an upwards turn again, rising to 3.5% in April and seeing a marginal decrease to 3.4% in May. The Office for National Statistics (ONS) confirms that the Consumer Prices Index (CPI) increased again in June, to 3.6%.
As this is above the government target of 2%, the BoE’s Monetary Policy Committee voted to maintain interest rates at 4.25% at its latest meeting in June.
But what are the effects of rising inflation on your personal finances, such as mortgages and savings?
Increased interest rates can lower inflation by decreasing consumers’ purchasing power
Inflation is calculated by the ONS, which uses a “basket” of around 700 goods and services, including small items like a loaf of bread, and larger items such as a car.
The overall price of this basket is used to calculate the CPI. By comparing the CPI with its value the previous year, the percentage increase can be calculated, representing the latest rate of inflation.
However, there is also a slightly different data set, the CPIH, which includes owner occupiers’ housing costs. According to the ONS, this stood at 4.1% in June 2025.
To attempt to meet its government target of 2% inflation, the BoE can choose to increase interest rates. Higher interest rates mean that people have less money to spend, which in turn can see price rises slow, ultimately reducing inflation.
Savers can benefit from high interest rates, but it might also be prudent to consider investment
While an interest rate rise might be good news for savers, it’s important to put this into context. While inflation can hit consumers’ purchasing power, it also impacts the value of your savings.
If the interest rate on your savings account is lower than the rate of inflation, your money isn’t growing fast enough to keep up and will be worth less in real terms.
Even if your interest rate is a little higher than current inflation rates, it will still grow sluggishly.
So, it’s important to regularly review your savings accounts, to make sure you’re getting the best-possible return. It could be that your cash would be more profitable in an ISA or longer-term investment, so be sure to speak to us.
Mortgage repayments can be higher if you’re not on a fixed-rate deal
In terms of mortgages, rising inflation and associated interest rate rises mean that repayments can be more expensive if you’re not on a fixed-rate deal.
As mortgage products are generally based on market expectations, if inflation remains high then the likelihood is that interest rates won’t be lowered. This means that the rates offered by lenders are also likely to be on the high side.
If your mortgage is on a fixed-rate deal, inflation won’t be an issue in the short term. But when it comes time to renew your deal – especially if that’s within the next year – high inflation could influence the new rate you’re offered.
If you’re on a tracker- or variable-rate mortgage, your repayments are likely to remain high in line with the base rate.
So, while high inflation and associated interest rates might not immediately affect your mortgage repayments, you could feel the impact in the near future.
The likely landscape for 2025 is a rise and fall in inflation followed by a cut in interest rates
Looking ahead, what is the expected trajectory for inflation and interest rates?
According to the BoE, increased interest rates have been working to bring inflation down from its peak of 11% in 2022. However, increases in energy and some regulated prices, such as water rates, are projected to see a rise in inflation to 3.7% in September, before it falls back to its 2% target.
Global trade tariffs could also affect inflation, although in what way is uncertain. While tariffs can reduce inflation if countries reduce the cost of goods they sell to the UK, costs can also go up if companies have to make supply changes. This, in turn, increases inflation.
However, if forecasts are to be believed, it’s likely that there will be a further cut in interest rates in the near future, possibly at the next meeting of the MPC on 7 August.
Working closely with your Fingerprint adviser can help you navigate the complexities of inflation and interest rates. We can help make sure your savings are in the right place to offer maximum returns, and look at your mortgage options to keep your repayments as low as possible.
Get in touch
If you’d like to talk to us about your savings or mortgage, please get in touch by emailing hello@fingerprintfp.co.uk or calling 03452 100 100.
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.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.