Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest.

THE last time prices were rising at this level Charles and Diana were about to separate, the Maastricht Treaty was being signed and artist Damien Hirst was putting a dead shark in formaldehyde.

Not since 1992 has UK inflation been as high as it is now - with the Office for National Statistics today confirming that the Consumer Price Index rose by 5.4% in the year to December.

What makes these price rises particularly painful is that they come most from spending that it’s hard for any of us to avoid. Anyone filling up their car will have noticed large rises in petrol prices, with the average cost of a litre of unleaded rising from 114.1p to 145.8p today. Just as stark has been the rise in household energy bills, where electricity has risen 18.8% and gas 28.1% over the year. Experts expect those rates of increase to go even higher in April when the UK energy regulator upscales its price cap on energy suppliers.

The reality for households is that 2022 is likely to be a year in which they become poorer in real terms. The price rises we have seen come while wages, although rising, are not managing to keep pace. This week also brought latest wage data showing annual pay rising at 3.5%. In other words, worker wages are losing 1.9% of value in real terms.

This is likely to be a new experience for most people. You would probably have to be at least 50 years old to really remember the environment 30 years ago when prices were last rising at this level.

Compounding the sense of squeeze this year will be tax changes and interest rate rises. National Insurance is due to rise in April - via an additional 1.25% levy - adding £255 to the average worker’s tax bill. Meanwhile, the high inflation we’re seeing is prompting the Bank of England to raise interest rates, which will push up the price of borrowing on mortgages, loans, credit cards or potentially anything else that requires a credit agreement, from car leasing to mobile phone contracts.

We’ve already seen one small rise in rates - from 0.1% to 0.25% - and a few more in 2022 now seem likely. The next meeting of the Monetary Policy Committee in February might arrive too soon for the Bank to act, but even that is not certain given the pace of price rises.

The question for the next few months will be how much of the current inflation we’re seeing proves transitory, and how much will prove much harder to dislodge. Clearly, the financial pressure on households is likely to dampen sentiment and this could feed through to weaker growth overall.

The options for mitigating inflation are limited - but there are some. This is a good time for us all to get on top of our regular spending, and to trim out wasteful purchases if we can. Beyond that, those with assets are likely to have to take investment risk to give their money the chance of keeping pace with inflation.

Watch our video on inflation - what it is and why it matters.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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