The UK inflation rate fell back to 7.9% in June. That meant it was lower than economists expected, but it was the 23rd month running that the main consumer prices index (CPI) has overshot the Bank of England’s 2% target. Although down from its recent peak of 11.1% in October, it still means the cost of living is rising rapidly.

What does the inflation rate mean?

The monthly inflation rates reported by the Office for National Statistics capture the change in the cost of living in the UK. There are several different rates recorded by the economists: CPI, the retail prices index (RPI), and CPIH (CPI including owner occupiers’ housing costs). It is CPI that was 7.9% last month. CPIH was 7.3%, while RPI was at 10.7%.

The indices measure changes in the cost of a huge number of products – from shampoo to secondhand cars, and services including insurance and air travel.

The rates are different because of the various goods and services included in the price tables, and also because of the way the figures are calculated. It is the annual CPI rate that influences Bank of England interest rate decisions.

Is it good that CPI has fallen?

Yes – but it’s still too high. Households are still having to pay 17.4% more for groceries than they were early last summer (a pint of milk is up by 21.7% year-on-year) and gas and electricity prices are up by 36.2% and 17.3%, respectively, putting a strain on household budgets. And on top of that some face rising mortgage costs – these are included in the CPIH, not CPI.

This week, figures from the Insolvency Service showed year-on-year increases in the number of people taking out debt relief orders and new breathing space registrations that allow people to freeze their debts for 60 days – a sign that people are struggling with high living costs.

What does it mean for borrowers?

The fact that inflation has dropped back a little is potentially good news for borrowers. If the rate had stayed above 8% then some economists had suggested the Bank may have gone for another half-point increase in interest rates next month. Instead, they are now betting that a quarter-point rise is more likely.

But with inflation still almost four times the Bank’s target there are likely to be further interest rate rises that will in turn lead to higher borrowing costs.

Mortgage rates linked to the base rate will go up if it is increased again. However, the latest inflation figures may mean that fixed-rate deals, which are tied to expectations of future rate rises, start to drop slightly.

Personal loans and credit cards have already become more expensive as a result of rising base rates and will get costlier if this month’s inflation figure persuades the Bank to vote for another increase in August.

What does it mean for savers?

Laura Suter from advice firm AJ Bell says a saver who put £1,000 in an average easy-access account a year will find it’s now worth £938 in real terms, having earned 1.18% interest over that period. “The top rate easy-access accounts would have paid more over that time, but nowhere near current inflation of 7.9%,” she says.

Competition in the savings market, combined with recent base rate hikes and pressure from the finance regulator have pushed best-buy savings rates to over 6% in recent weeks, which in normal times would sound fantastic. However, while inflation remains higher the value of any money you keep in an account is still effectively falling.

If you believe that inflation will eventually come down, then locking into an account paying that rate for three years could mean you will happily beat inflation before the end of the term.

Who is losing out?

Anyone whose income growth has not kept up with inflation will be suffering, but some people will be harder hit than others. A campaign group called the Deprived Pensioners Association says there are 60,000 members aged over 80 of now-defunct retirement schemes whose payouts are not linked to inflation who are at risk of “serious financial hardship”.

State benefits did rise by 10.1% in April, offering some relief to those on the lowest incomes, however, there are clearly people struggling to keep up with rising living costs. Last week, the ONS published research showing that one in 20 adults had run out of food and been unable to buy more at some point in the spring.

What does this mean for pay and benefits?

Wages have been increasing, with recent figures showing that annual earnings growth hit 7.3% in the three months to May. However, a higher rate of inflation means that workers are still out of pocket despite that growth so employers may come under pressure to consider further increases.

June’s inflation figure is not used to set any government-backed payments or prices.

Typically, July’s data determined the next year’s regulated rail fares. This year, a different figure was used but it will be worth keeping an eye on next month’s inflation report in case the government goes back to the usual formula.

The government uses September’s figure to set state benefit rises for the following financial year, so if inflation stays high it could lead to discussions in government about whether to stick with the pensions triple lock. Last year, the chancellor, Jeremy Hunt, was reported to be considering dropping the promise to use inflation for the calculation if it was the highest of the three measures.