Inflation hit 4.2pc in October and there will be growing unease at the Bank of England that rapidly rising prices are causing living costs to spiral.

The Consumer Price Index is at the highest level since 2010 on the back of rising petrol and household energy costs. This is well above the Bank of England’s 2pc target, and significantly higher than experts had predicted.

UK inflation is expected to hit 5pc by April next years. Despite this, the central bank held interest rates at 0.1pc earlier this month, the lowest ever level. However, there will be pressure on policymakers to increase to this 0.25pc on December 16.

How much of a risk is rising inflation, and how can you protect your finances? Telegraph Money has the answers.

What is the rate of inflation, and why are prices rising?

Inflation measures the rate of increase in the price of goods and services. The Consumer Prices Index, which forms the basis for the Government’s inflation target, looks at the cost of hundreds of items, from food to cinema tickets, to track any rise or fall in costs.

Inflation has already risen to 4.2 pc and is expected to climb as high as 5pc early next year, more than double the official 2pc target. The Bank of England has blamed surging global energy prices as well as “bottlenecks” in the supply of goods across the world for the rise in costs.

Governor Andrew Bailey said the factors pushing up inflation should be temporary, but that depends on whether they feed into wage growth and prompt further price rises.

Who benefits from high inflation?

Inflation is bad news for savers and those on fixed incomes, who see their purchasing power reduce in real terms. 

That is because everyday expenses, such as food and fuel, are rising. Food prices are rising at their highest rate since August last year, according to data firm Kantar. 

However, those with debts on fixed repayment plans can benefit from inflation, including the Government, as the size of the amount owed is reduced in real terms. 

Will inflation harm my investments?

Bond owners could suffer the most. Investors sell bonds – which pay a fixed return, or “coupon” – when inflation rises as it eats into the real value of that income. Higher inflation would also increase the likelihood the Bank of England raises interest rates, which would be bad news for bonds as it decreases the relative value of their payments versus newly-issued bonds. 

Famed investor Warren Buffett has always warned investors off buying bonds when inflation rises. He said they were “not the place to be” and investors faced a “bleak future” because the income they offered was at rock bottom. Rising inflation would decrease the real value of this income further. 

Investors can protect themselves by buying index-linked bonds, where interest paid rises in line with inflation. 

Inflation, in moderation, is not necessarily bad for stocks, as companies can pass costs onto consumers to balance out rising input costs. Companies which have strong pricing power, such as utilities or large consumer brands, should be able to carry on with business as normal. 

Richard Hunter, of stockbroker Interactive Investor, said oil and mining companies would do well as rising commodity prices would be good for their bottom lines. He added that utility groups often pay dividends linked to inflation. “Investors benefit from a double whammy of passing costs onto consumers and bigger dividends,” he said.

However, inflation could be bad for retailers, such as supermarkets, which may lack the ability to increase prices, he said.  

Infrastructure and real estate investments often have contracts linked to inflation, so their income and dividends would rise as inflation does. Gold could also rise in value. Supply is relatively fixed, so more money floating around the economy should increase what people are willing to pay.