14 February 2012 Last updated at 11:28 ET

Inflation: Who is hardest hit?

Inflation is one of the key UK economic measures

Inflation - or the rising cost of goods and services - is one of the key measures that affects our financial well-being.

And it is now undermining the living standards of most people in the UK.

Although the rate of inflation has fallen over each of the past four months, prices are still rising above the government's target rate of 2%.

The inflation rate still stands at about double the level of wage rises, so millions of people are seeing their household bills rising, and their income failing to keep pace.

What is inflation?

Inflation is the rate of change in the level of prices for goods and services, which affects the purchasing power of money.

It is measured by the Office for National Statistics, which charts the prices of hundreds of goods and services - from basic items such as bread to new products.

On the government's preferred measure of inflation, the Consumer Prices Index (CPI), inflation stood at an annual rate of 3.6% in January.

But as with many economic measures, the headline figures do not always tell us the whole story.

So, with prices rising, who is being hit the hardest?

Interest and savings

The key is to consider inflation alongside wages and interest rates.

At present, interest rates are at a record low. With the Bank rate at 0.5%, savings are not gaining in value very much.

This particularly hits those who have not moved their savings around to get a better rate of interest.

The Bank of England says that the average instant access account offers interest of just 0.21%, while cash Individual Savings Accounts (Isas) offer, on average, just 0.61%.

Following the January figures, financial information service Moneyfacts said that a basic rate taxpayer needed to find a savings account paying 4.5% a year to beat CPI inflation.

A higher rate taxpayer, with an income tax rate of 40%, needed to find an account paying at least 5.99% to beat CPI inflation.

Taxpayers could choose from 47 accounts that negated the effects of tax and inflation, it said, which was a pick-up from previous months.

"The number of savings accounts that beat inflation has risen from a miserly eight last month to a much more respectable 47 today, many of which are fixed-rate Isas," says Sylvia Waycot, of Moneyfacts.

"However, this is a small blessing when compared to the total number of standard savings accounts available which is 1,100."

Pensioners

Anyone on a fixed income or trying to live off the income from savings is suffering from the effects of inflation - because the things they are buying are rising in price, unlike the funds they have to pay for them.

People on low incomes have suffered higher inflation than those on higher incomes in the past decade, according to a study by the Institute for Fiscal Studies (IFS).

The IFS said the difference in fortunes had been particularly marked since 2008, and pensioners on state benefits had been especially hard hit.

People on lower incomes spend a higher proportion of their money on gas, electricity and food, while those on higher incomes have benefited more from lower mortgage rates.

Investment company Alliance Trust suggested that in January, the over-75 age group had the highest rate of inflation, at 4.3%.

This was primarily the result of gas and electricity bills, although these costs are expected to dip in the coming months.

Workers who have seen their wages held down, or even frozen, are seeing their spending power fall.

Inflation is also used in the calculation of some services - such as rail fares.

So some commuters saw big price rises in the new year which were calculated from the inflation level in July.

Is anyone winning?

While rising inflation and low interest rates may be eating away at savings, the same effect could be good news for those in debt.

Over time, the value of the debt will reduce, because the amount borrowed will not be worth as much owing to the effects of inflation.

In fact, 4% inflation every year will halve the value of money in 18 years. Inflation at 5% will do the same in just 14 years.