July’s inflation dip offers little respite to UK savers

13th August 2013


Inflation, often referred to as the ‘silent assassin of savings’ fell back in July but the dip is of little consequence to savers who will still struggle to find an account to quash its impact writes Philip Scott.

According to the Office for National Statistics, inflation as measured by the Consumer Price Index (CPI), dropped back to 2.8 per cent in July from 2.9 per cent in June. The largest contributions to the fall in the rate came from air fares, plus price movements in the recreation and culture, and clothing and footwear sectors. A rise in petrol and diesel prices partially offset the fall.

Inflation, otherwise known as a rise in cost of everyday living can dramatically erode consumer spending power, as the higher it rises, the less cash is worth and people have to spend more to purchase the same items.

The effect of inflation on savings means that £10,000 invested five years’ ago, allowing for average interest and tax at 20 per cent, would have the spending power of just £8,842 today.

At its current rate, a basic rate taxpayer at 20 per cent needs to find a savings account paying 3.50 per cent per annum, while a higher rate taxpayer at 40 per cent needs an account paying at least 4.66 per cent.

These are dark days for savers as there is only one standard savings account to beat basic rate tax and inflation, a seven-year bond, from Skipton, which is a long commitment. Rachel Springall, finance expert at comparison service, Moneyfacts says:  “Savers would be wise to be wary of locking their money away for the long term. The market remains volatile so opting for an easy access account to move money more freely is a safer option.

“Inflation is expected to remain above the 2 per cent target for some time, so it is a bleak forecast when it comes to saving, especially for those relying on interest to supplement their income.This time last year savers could get 3.50 per cent in a two-year bond, but today they would need to invest for a staggering seven years to get the same return. Only one year ago there were 227 accounts out of a total of 1,092 that beat basic rate tax and inflation, including 128 ISAs.”

Last week, Bank of England Governor Mark Carney confirmed via his ‘forward guidance’ that interest rates, still glued to their record low of 0.5 per cent, would not be rising until job numbers in the UK improve. In its August Quarterly Inflation Report, the Bank of England projected inflation to average 2.82 per cent in the third quarter but ultimately any change to base rate in the foreseeable future is not a guarantee that savings rates will rise.

Howard Archer, chief UK and European economist at IHS Global Insight says: “July’s dip in inflation will be well received by the Bank of England as it supports hopes that consumer price inflation is near to peaking, and may even have done so. This may help to dilute current market doubts that the Bank of England will not raise interest rates before 2016.

“Our best bet is that consumer price inflation will dip to 2.7 per cent by the end of 2013 and then trend down further to end 2014 just above 2 per cent. We expect the Bank of England to keep interest rates at 0.5 per cent through to early-2016 but we believe they could start rising gradually early in 2016.”

As a result of inflation, more and more savers have been ploughing millions into the UK stock market recently in the hope of getting a better return from their hard-earned cash. The latest figures from trade body the Investment Management Association show that UK equity funds in June, saw the highest net retail sales since October 2006, at £479m. Of course with the opportunity of better returns comes greater risk.

Read Mindful Money’s expert tips on where to invest to beat the impact of inflation.

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