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Rocketing prices are gnawing away at the value of our savings, reducing our spending power. But how can you beat the pain?
A rise in inflation was expected this week, but few anticipated such a dramatic surge. The UK Consumer Prices Index (CPI) measure of inflation soared to an eight-month high of 3.7% last month, compared to 3.3% in November.
Meanwhile the Retail Prices Index, which includes mortgage interest payments, rose to 4.8% from 4.7%.
CPI inflation has now been above the target rate of 2.0% for 12 consecutive months - and no one expects it to fall back to that level any time soon.
In fact, with the hike in VAT and the soaring cost of petrol, food and energy, it's likely that inflation will remain high for the foreseeable future.
Of course, the longer inflation remains high, the greater the pressure on the Bank of England to raise the base rate, which is a real concern to mortgage payers. So we may be out of recession but most of us are still suffering financially. Here, we take a look at how you can start fighting back.
Sort your savings
A toxic combination of high inflation and low interest rates is really hurting those who can afford to put some cash away.
In fact, basic rate taxpayers now need an account paying at least 4.63% to earn real returns on their savings, while higher rate taxpayers would need to earn 6.17%.
That means no savings accounts beat the combined force of inflation and taxation just now.
If you'd had £10,000 in a saving account paying the average rate of 0.19% last year, you'd have lost £331 as a result of inflation. That means it's time to act, and tax-free ISAs and fixed rate savings accounts can really help you shield yourself.
The best easy access account just now is the Post Office's Online Saver, paying 2.90%. Although it's a good idea to keep some money where you can get at it in an emergency, that's easily beaten by the market-leading AA 5 Year Fixed Rate Savings account, paying 4.50% on a minimum deposit of just £1.
However, to get that top rate, you need to agree to leave your cash untouched for the full five-year term. Many savers will struggle to do so, or be concerned that interest rates will rise in the meantime, leaving them stuck in an account that no longer looks competitive.
Reduce your mortgage
Another option is to use your savings to pay down your mortgage. Everyone should keep a rainy day fund handy in case of emergencies, but could you afford to pay off a chunk of mortgage with any nest egg?
That way you cut back on the interest you pay and the lifetime of the loan. Most lenders allow you to repay an additional 10% every year, while the Co-operative Bank and Britannia just announced that borrowers can repay up to 50% of their mortgages without being stung by penalties.
If you want to keep access to your cash then it may be worth considering an offset mortgage. You won't earn any returns on your money, but you'll cut what you pay in mortgage interest while retaining access to your cash.
Protect yourself from interest rate rises
If you don't have many savings and are on a variable rate mortgage, then your main concern is probably that high inflation will drive up the Bank of England base rate and your mortgage costs will soar.
That's the last thing you want, given the high cost of living, but a rising number of economists are predicting base rate will rise in the first half of this year. A 1% rise in base rate would add £77 a month to the average tracker mortgage.
So, if you're concerned then consider locking into a fixed rate mortgage to protect yourself from rate hike shocks.
At the moment, homeowners with 25% deposit or equity could fix for two years at a rate of just 2.99% with Yorkshire Building Society, with fees of £495.
If you have 40% or more of the value of your home, you could remortgage for just 2.65% with Santander, although you'll pay fees of £1,995.
Again, it's a good idea to speak to a mortgage adviser if you need help finding the right product for you.
Pay less for petrol
The price of filling the car is hurting motorists and taking a sizeable chunk out of household budgets. At the moment, the average price of unleaded fuel is £1.32 a litre and many motorists are being forced to cut back on their car use as a result.
But there are steps you can take to drive down fuel costs. Find the cheapest fuel in your area using petrolprices.com, arrange a car share with a colleague and make use of supermarket loyalty schemes that give you money off.
Heat your home for less
As if consumers weren't battling enough price hikes, five out of the big six energy suppliers have upped their gas and electricity bills over the last few months.
But anyone sitting on their provider's standard tariff could save money by moving to an online deal, or even their energy company's cheapest deal.
For example, the average Scottish Power customer pays £1,357.18 on its standard tariff, but they could save £370 by moving to the market-leading EDF Energy Online Saver V8. That has an average bill of £987.08.
Discover some discounts
You can shop for less by using discount vouchers and online codes. Whether you make use of your regular supermarket's loyalty scheme or simply check for vouchers before treating the family to a pizza, there are plenty of ways to make savings.
Regular voucher hounds are saving themselves an average of £55 a month by using online vouchers and codes. That kind of saving can really help cushion your budget from the soaring cost of living.
By Felicity Hannah, deputy editor at moneysupermarket.com
Please note: Any rates or deals mentioned in this article were available at the time of writing.
