Inflation jumped unexpectedly to an 18-month high of 3.8pc in July, up from 3.6pc in June, and above analyst predictions of 3.7pc.

Transport, particularly the cost of air fares, made the largest upward contribution to the increase, according to the Office for National Statistics (ONS). Food and beverage costs also edged up.

In response to the figure, Chancellor Rachel Reeves said there was “more to do to ease the cost of living”. She added “That’s why we’ve raised the minimum wage, extended the £3 bus fare cap, expanded free school meals to over half a million more children, and are rolling out free breakfast clubs for every child in the country.

“Through our Plan for Change we’re going further and faster to put more money in people’s pockets.”

News of the surprise increase complicates the picture for the Bank of England as policymakers decide whether they can cut interest rates again to boost the economy. The inflation figure is still well above the Government’s 2pc target.

Rate setters lowered borrowing costs from 4.25pc to 4pc earlier this month but traders were betting this week that they will likely be unable to do so again in the face of rising inflation.

This could have a significant impact on your finances – including savings, mortgages and investments. Here, Telegraph Money explains what your options are:

What does the latest inflation figure mean for your mortgage?

What does rising inflation mean for your savings?

What does it mean for your pensions and investments?

Inflation is the term used by economists and governments to describe the speed at which prices are rising.

In Britain, we usually measure inflation by comparing the price of a particular item to its price at the same time the previous year.

For example, if a chocolate bar cost £1 in May 2024 and then in May 2025 it costs £1.04, its price has risen by 4pc and thus inflation for this particular item stands at 4pc.

However, statisticians have to calculate the pace of price rises across the whole of the economy and use a variety of methods to estimate this as accurately as possible.

The most closely followed of these methods used by the Government and the Bank of England (BoE) is the Consumer Price Index, often abbreviated to CPI, which is published each month by the Office for National Statistics (ONS).

This calculates inflation based on a basket of hundreds of goods and services, which statisticians at the ONS update every year.

Higher inflation means we are less likely to see Bank Rate cuts, and therefore lenders will be less likely to cut mortgage rates – so borrowing may be more expensive.

Mortgage rates have remained high over the past two years, adding financial pressure across the housing market.

For first-time buyers, higher rates of borrowing have made it harder to get on the housing ladder, while existing homeowners face a mortgage shock when coming off ultra-low fixed rate deals and on to new loans at today’s rates.

At the time of writing, the average two-year fixed rate mortgage is 4.98pc, according to analyst Moneyfacts.

Fixed-rate and variable-rate mortgages are linked to the Bank Rate, although not necessarily directly.

David Hollingworth, of L&C Mortgages said: “It was widely expected that the rate of inflation would increase in July but today’s figures have edged higher than anticipated. That will be a blow for those hoping for further base rate cuts and could signal that rates will remain higher for longer.

“Mortgage borrowers have been enjoying a market where rates have been dropping. Fixed rates have been pricing in the recent and future cuts, so have been edging down with a host of deals now below 4pc. Those reductions have tended to come in small increments, but we could see that slow further or even reverse in some cases if the market reacts badly to the threat of higher inflation than was previously expected.

“Borrowers holding out for more cuts may want to keep close tabs on mortgage rates. It’s far from doom and gloom but securing a rate now will protect against any turnaround but still allow a further review before completion, if there are further improvements.”

If you’re due to remortgage soon, our mortgage cost calculator can tell you how a new deal will affect your monthly bills.

For homeowners coming to the end of their fixed-rate mortgage it is important to remember you can start reviewing your options three to six months in advance and lock into a deal without committing to it. If rates then go up before you need to finalise your loan you are safe, but if rates fall in the interim you can choose a better deal.

Nicholas Mendes of broker John Charcol said: “For mortgage holders with less than six months remaining on their fixed-rate deal, it is advisable to start reviewing your options now.

“Many lenders allow you to lock in a new rate up to six months in advance, which could shield you from potential further increases.”

For those purchasing a property, at the time of writing one of the best two-year fixed deals on the market is from Danske Bank, at 3.59pc. You’ll need to have a deposit of at least 40pc, and it comes with a £999 fee. One of the cheapest five-year deals also comes from Lloyds, at 3.81pc, with a £995 fee.

If you are remortgaging with 40pc equity, Lloyds 3.71pc deal is one of the cheapest, although it comes with a £999 product fee – as doesSantander’s five-year deal, which comes in at 3.78pc.

Rising inflation is bad news for savers, particularly when the Bank Rate is on the way down. While there are still deals on the market that can beat the July rate of 3.8pc, you’ll need to make more of an effort to find them. In fact, fewer than half of available savings accounts can beat inflation at the time of writing, according to Moneyfacts.

That being said, if the Bank of England slows future Rate cuts then savings rates may not fall quite as quickly as they could have done otherwise.

The average easy access savings rate is currently 2.63pc, according to Moneyfacts, but the most competitive accounts still pay around 4.7pc – though they are becoming increasingly rare.

Caitlyn Eastell, of Moneyfactscompare.co.uk, said: “After almost a year and a half of savings growth, many savers are slipping back into earning negative real returns as inflation figures jump again. The Moneyfacts Average Savings Rate currently sits at 3.47pc, lower than the latest CPI reading of 3.8pc. Adding insult to injury, there are also hundreds fewer inflation-beating deals available compared to 12 months ago.

“With inflation running higher than the interest savings earn, money left languishing in a low-interest account is losing its spending power – making it tougher to achieve a sense of financial resilience or save towards goals such as a car, house or comfortable retirement. This comes hot on the heels of the latest base rate reduction which had an almost instantaneous effect, with over a dozen savings account providers cutting variable rates within 24 hours and many more likely to tumble in the coming weeks.”

It’s important to make sure your savings are earning a rate higher than inflation wherever possible, as inflationary price rises eat into the value of savings – put simply, the rising prices mean your money won’t be able to buy as much as it previously could.

Our inflation calculator can show you how much your savings are being eroded by price increases.

As a minimum, you should check your current savings rates and make sure they’re higher than the inflation rate.

Planning ahead, it might be a good time to commit to a fixed-term account if there’s cash you won’t need to access for at least a year.

Derek Sprawling, managing director of Spring savings, said: “The increase in the rate of inflation further erodes the value of savings earning a poor rate of interest. With over a half a trillion pounds sitting generating nothing or 1.5pc or less, savers need to act and make their money work harder to maintain its value.

“Of course, everybody will have their own inflation rate based on individual circumstances and that is likely to be more than the official figure given the upwards cost pressure on housing, utilities, food and general living. The good news is that there are still options for people to generate a return above the rate of inflation and I would urge people to not accept a poor return on their cash.”

At the time of writing, Chip’s easy-access account is offering 4.84pc paid monthly.

For a fixed account, Aldermore Proper pays 4.63pc for a six-month bond, with a minimum deposit of £10,000.

To find top savings rates, updated daily, see our guides to the best easy-access accounts and best fixed-rate bonds. You can also find the best notice accounts, top regular savers and best rates available for current accounts that pay interest.

For options to protect your returns from tax, see our guide to the best cash Isas and best lifetime Isas.

And, if you want to put money away for your children, see our guides to the best Junior Isas and best children’s savings accounts.

The stock market is not officially linked to inflation or the Bank Rate, but as both are significant indicators of the state of the economy, they can have a big impact on investor sentiment.

With rising inflation eroding the value of cash savings, some may turn to investing in a bid to get higher returns.

Alice Haine, of Bestinvest by Evelyn Partners said: “Making full use of the £20,000 ISA allowance or topping up a pension can help shield savings from tax. Making money work harder is important as investing typically delivers a higher return than cash over the long term, though investors must be prepared to put their money away for at least five more years to ride out any short-term volatility in the markets. That’s why access to the right guidance is crucial, especially for novice investors navigating investment decisions for the first time.”

However, it’s important not to make any rash decisions based on inflation data alone. Investing should be for the long term, as Dean Butler, of Standard Life, part of Phoenix Group, explained: “For those able to accept a level of risk, investing offers the potential for higher growth, but remember that investments can go down as well as up. If you’re able to take a long-term view, pensions are a powerful tool, combining potential compound investment growth over many years with employer contributions and tax efficiency.”

For those planning their retirement, annuities can offer guaranteed retirement income when you’re no longer working. Some are inflation-linked, which can help with rising costs over time.

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