What is the inflation rate and how does it affect your mortgage?

What is the inflation rate?

The inflation rate is the measure of how much the price of products or services has increased over time. For example, if a loaf of bread cost £1 today and £1.05 this time next year, annual bread inflation would be 5%. The changes in price from one month to the next is used to calculate the UK’s inflation rate.

To work out the inflation rate, the Office for National Statistics (ONS) tracks the prices of everyday items by creating an imaginary ‘basket of goods’ - 744 items to be exact. This is known as the Consumer Prices Index (CPI), but you might also see it as Consumer Prices Index including housing costs (CPIH).

The basket is regularly updated to ensure it’s an accurate reflection of consumer behaviour. In 2024, air-fryers, vinyl music, gluten-free bread and edible sunflower seeds were added to the basket, while hand hygiene gel and rotisserie-cooked chicken were removed.

What is the current inflation rate in the UK?

The latest inflation figures are from April 2025, which show that the current inflation rate (CPI) in the UK is 3.5% - the highest rate in the G7, fueled by higher energy bills and housing costs. This 0.9% rise from the previous month was more than expected and is 1.5% above the 2% target set by the Bank of England a couple of years ago when prices began to increase.

Gas and electricity prices increased in April off the back of the latest Ofgem policies, meaning many households are now paying more for electricity and gas again. For an average household paying by direct debit for dual fuel, the price rise equates to £111 over the course of a year. But the cost of water rose the most by 26.1% - the largest rise since at least February 1988.

How does inflation impact me?

Inflation impacts the general cost of living, as well as things like the buying power of your money. When inflation rises, the price of everyday items and services increases; interest rates also tend to increase, impacting the rates we can get on loans such as mortgages and savings accounts. Rising inflation also means that wages have to work harder to keep pace with these increases, otherwise your earnings won't go as far as before!

When a person’s wages fail to keep up with inflation, they’ve effectively been given a pay cut. Even though their pay is higher than it was before, it won’t go as far if the cost of food, clothes, energy, petrol, and other living expenses has risen at a much faster rate. Although the most recent figure shows the growth rate is at 5.9%, but when you adjust this for inflation, the annual growth in real terms is 2.1%.

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How does inflation affect mortgage rates?

When inflation rises dramatically, the Bank of England looks for ways to reduce it. One of the most common strategies used to curb inflation involves increasing the base rate. This is the rate the Bank of England charges other banks and lenders to borrow money. It increased multiple times over 2023, but over 2024 it was cut twice, with the base rate now standing at 4.25%.

When the base rate goes up, this tends to influence mortgage lenders to increase their own interest rates. This can be bad for borrowers, as it can lead to higher borrowing costs, making their debts more expensive, including mortgage repayments.

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Does inflation affect fixed rate mortgages?

If you have a fixed rate mortgage, you won’t see a change in your monthly payments when the inflation rate rises until the end of your fixed term. When your fixed term expires, you’ll usually be moved onto your lender’s standard variable rate, which rises and falls based on changes in the market, or you can remortgage onto a new fixed rate deal.

In the months before your fixed rate expires, it’s a good idea to start looking for a new mortgage deal. Luckily, this is something we can help you with. Our smart tech will compare thousands of mortgage deals across the market in an instant to find which ones you’re eligible for. Create a free Tembo plan to get started. 

Should I fix my mortgage?

If you’re on a variable rate mortgage or your current fixed rate mortgage deal is coming to an end, we recommend looking at both fixed rate and variable deals to compare what’s available. During periods of market volatility, a fixed deal can protect you from fluctuations.

For example, in the 1990s and early 2000s when interest rates fluctuated between 3.5% and 14.88%, those lucky enough to fix at the lower end of the scale were offered a lot of protection. 

Equally, a variable rate mortgage can offer an opportunity to access lower interest rates and therefore lower monthly repayments. To understand whether a variable rate might suit you, calculate what your monthly repayments would be with the current market rates on variable mortgages. Add 1%, 2% and 3% to the interest rate and check the repayments. Does that seem comfortable for you? If not, the risk might not be worth the potential reward for you.

It’s always best to seek expert advice when it comes to deciding whether to fix your mortgage or not. If you feel overwhelmed looking at the different rates available, get in touch with our expert team.

Read more: How long should I fix my mortgage for?

How does inflation affect savings rates?

Inflation impacts the savings interest rates by influencing what rates savings providers, such as banks and building societies, can offer their customers. The Bank of England charges other banks and lenders to borrow money through the base rate. When the base rate goes up or stays high, this makes it more expensive for providers to loan money to their customers, so they typically will also raise their interest rates in response.

Inflation also impacts the purchasing power of your money. High inflation erodes the purchasing power of your money over time unless the interest you earn on your savings outpaces inflation. Banks may respond to high inflation by increasing savings rates to attract deposits, but the rates offered by big, well-known providers often still lag behind inflation. This is why looking for the most competitive rate - not just the biggest name - can help you make your money work harder and protect its purchasing power over time.

Is inflation a problem in the UK?

Inflation has been close to the Bank's 2% target since the middle of last year, having fallen back from the peak of more than 11% in late 2022 after the Russian invasion of Ukraine sent energy prices sky high. But now it's climbing again, with the market expecting it to peak at 3.5% over the summer months, and won't return to 2% until early 2027.

With inflation way above the Bank's 2% target, you'd expect a base rate cut to be off the cards, which would likely keep the interest rates offered by the providers on the savings and mortgages high too. However, these high borrowing costs are squeezing businesses and households at a time when economic growth is looking shaky due to the uncertainty caused by Trump’s trade wars. The Bank will need to balance cutting rates too soon with supporting the economy - it's likely that if they do cut rates, it might not be by as much as previously expected. This will likely result in mortgage rates and savings rates coming down much slower.