UK inflation has defied economists’ expectations after a surprise rise from 3.9% to 4% in December, largely driven by increases in tobacco and alcohol prices.

This is the first time that inflation has increased since February 2023, according to the Office for National Statistics (ONS).

Experts originally expected inflation to fall slightly from 3.9% to 3.7% in December.

We reveal what the latest inflation figures mean for your money and what you need to know.

Why inflation is an issue  

Over the last two years, high inflation has been a big issue in the UK, driving up prices and pushing the Bank of England (BoE) to do 14 consecutive base rate rises to help bring inflation down.

This strategy recently started yielding results, but the latest inflation data has bucked this trend while wage growth has slowed.

While base rate cuts are still forecasted for this year, if inflation instead fell in December, there was a chance that these could happen earlier than originally expected.

If inflation rises further in the future, which is a risk with the Red Sea disruption, there is a chance of a base rate increase. However, this is unlikely at the moment.

“Whilst markets are still hopeful rate cuts will come thick later this year, the date for that to commence has slipped back,” commented Danni Hewson, head of financial analysis at AJ Bell. 

“Looking forward, there are so many variables at play, central bankers are likely to want to keep their powder dry for as long as they can.” 

What does rising inflation mean for mortgages? 

Amid a mortgage rate war, the rise in inflation could be bad news for homeowners.

It could lead to a pause in fixed-rate mortgage cuts and a chance that competitive deals may be on offer for a limited time.

Last week, the Co-operative Bank pulled its leading mortgage rates just days after launch.

If the BoE decides to cut the base rate later than mid-2024, this could mean rates stay higher for longer for those on variable-rate mortgages.

If you’re considering remortgaging, you can remortgage six months in advance and switch to a better deal before your existing offer ends.

Buying your own home? A mortgage broker can search the whole market for the most competitive mortgage for your circumstances.

What does rising inflation mean for your savings? 

For savers, rising inflation may be a positive as it means the recent savings rate cuts may be paused – or there may even be some more competitive deals.

Only a few months ago, you could get 6% on your fixed-rates savings; now it’s around 5.3%.

If you haven't fixed your savings yet, it’s still a good idea to do this now – if inflation falls in the future, interest rate cuts can happen more quickly, impacting savings rates. 

If you’re looking for the best rates, consider a fixed-rate account or even investing.

Unbiased can help you quickly connect with a financial adviser who can help you build the best investment strategy for you and recommend the right investments.