After spiking at a 41-year high in October 2022, Office for National Statistics (ONS) figures confirm that UK inflation has broadly fallen back to pre-pandemic levels. Inflation is easing globally, too, prompting the International Monetary Fund to claim recently that “the global battle against inflation has largely been won”.
However, a higher-than-expected UK figure in January could have a knock-on effect on future interest rate cuts. Meanwhile, Donald Trump’s aggressive tariffs could lead to an inflation rise in the US.
Keep reading to find out more about the likely landscape for global inflation over the coming months and what (if anything) this could mean for you and your long-term financial plans.
Increased inflation levels leading to reduced real-terms returns, along with rising prices
As the UK began to emerge from pandemic-imposed lockdowns, it found itself lurching into a new type of crisis: this time, a financial one. For many investors, 2022 was a challenging time, with inflation spiking at a worrying 11.1%. The knock-on effect saw a huge hit to real-terms returns on portfolios containing stocks, bonds and alternative assets.
While the Consumer Prices Index (CPI) currently stands at a much more modest 3%, this was nonetheless an unexpected jump from the 2.5% of December 2024. You could also be forgiven for thinking that falling rates mean falling prices but, conversely, it means that prices are still rising, albeit at a slower rate.
What is the link between inflation and the Bank of England’s base rate?
Keeping inflation at a manageable level (around 2%) is a UK government priority. The Bank of England (BoE) does this by using fluctuating interest rates – raising them when inflation is high and reducing them when it’s low. It is hoped that this leads to a direct change in spending habits: if consumers are paying out more for their mortgage, for example, they will likely curb their spending. Conversely, they’re more inclined to save if interest rates are more tempting.
However, these changes aren’t immediate, and it generally takes a few years before they have the desired effect.
The global inflation landscape: how war, deflation and tariffs are causing worldwide repercussions
Russia’s invasion of Ukraine caused worldwide consternation about its potential effect on world peace. However, it also brought serious global financial implications, with fuel and food shortages, along with supply chain disruptions, sending inflation rates rocketing. In a world already battered by the pandemic years, this was a financial hit to an already weakened global economy.
While UK inflation has fallen much closer to the BoE’s 2% target, the cost of living crisis exacerbated by the Russia-Ukraine war continues.
Meanwhile, China is recording deflation, with figures dropping to 0.7% in February 2025. Domestically, this could lead to reduced spending and falling wages, setting the stage for a potential recession. Globally, this could mean lower costs for imported goods from China, hitting demand for internally produced products or those from other trading partners.
Inflation in the eurozone stood at 2.4% in February 2025, a slight easing from the previous month. However, new tariffs imposed by President Trump’s administration are likely to have a negative impact on both inflation and interest rates as they start to take effect.
The US inflation rate has also declined in recent months, falling to 2.82% in February 2025 compared with 3.15% the previous year. Trump’s raft of economic measures along with immigration caps are designed to boost the US economy. However, this is disputed by many economists.
In fact, Joseph Stiglitz, an economics professor at Columbia University, was recently quoted by the Guardian as saying “Virtually all economists think that the impact of the tariffs will be very bad for America and for the world […] They will almost surely be inflationary.”
What does all this mean for your money?
The trickle-down effect of both domestic and global inflation can directly impact your capability for long-term saving and retirement planning. While it might not seem that economic policy across the pond has much to do with your financial planning, the reality is that it can be a major factor.
Rising inflation rates often lead to higher interest rates, as central banks look to curb rising prices. This could mean you need longer to pay off your mortgage, something to carefully consider in your budgeting.
Meanwhile, a higher cost of living, by definition, means your retirement fund won’t stretch as far. So, you need to give some consideration to how you manage and balance your pension withdrawals.
But… there is good news. While global events affect global markets, these are often short-term ripples so there’s no need to panic.
The overall takeout: keep calm and carry on
Inflation has a direct impact on how far your money goes and can curb your spending habits. Conversely, the parallel rise in interest rates can boost your savings and encourage you to put more away.
Undoubtedly the UK economy will continue to be buffeted by world events throughout 2025, including a probable impact on inflation. But as ever, the best course of action is to stay calm, stay focused, and stick to your plans.
Get in touch
If you have any questions about the impact of inflation on your long-term retirement plans, speak to us now. 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.
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.