Small drop in UK inflation brings little hope for savers, investors and home owners, it is claimed

Written by Ray Clancy

Wednesday, 18 August 2010 09:06

A tiny drop in the UK’s inflation rate is not likely to have much impact on investors, savers and property buyers, according to experts
The latest inflation figures show that the Consumer Price Index (CPI) has fallen to 3.10%, a marginal fall of 0.10% from the previous month but still way above the Government’s 2% target.

Hopes of any longer term reductions may be stunted when we see the implementation of the VAT increase early next year and speculation that that petrol prices are soon to spiral, warned Darren Cook of moneyfacts.co.uk.

He points out that to stop their savings pot effectively eroding away, a basic rate tax payer needs to find an account paying 3.88%, while a higher rate tax payer needs to find an account offering 5.17%.

‘Inflation is a stealthy enemy for savers and when rates are low, it quietly erodes the spending power of a hard earned nest egg. Savers may have had a short respite from a marginal fall in inflation, but savings rates have hit a plateau and may be there for a while,’ he explained.

He points out that the average one year fixed bond rate has fallen from 3.07% in January to only 2.54% today and the average five year fixed bond rate has fallen from 4.56% to 4.08% for the same period.

‘The average instant access savings rate is still at rock bottom at a rate of only 0.74%. The only trigger for any improvement in savings rates may be a surprise increase in the Base rate by the Bank of England, but this is most likely not to happen soon,’ he added.

Basic rate tax payers have access to 87 accounts, but some of the higher returns still require an existing riskier longer term investment product at the same time. ‘To just break even, higher rate tax payers need to find an account paying 5.17%, a level that is nigh on impossible to achieve. Only 87 out of a possible 1,244 accounts allow a basic rate tax payer to just break even at 3.88%. 51 ISA accounts beat inflation at 3.10%,’ he said.

Kevin Mountford, head of banking at moneysupermarket.com, said that inflation has slowed but Britain’s savers still face an uphill struggle to generate value from their savings.

‘It’s undoubtedly difficult for savers to make a positive return on their money with inflation well above the Bank of England’s 2% target and interest rates at a historic low. Coupled with this households are facing rising living costs which is adding an extra squeeze to family finances. However, many people could be doing more than they are to lessen the effects of the current economic environment,’ he explained.

The majority of savers have money sitting in accounts paying less than the 0.5% and should move it to a higher paying account. ‘As well as maximising the returns you make on your savings, look at other ways to reduce the impact of inflation on your family finances: spend wisely; use discount vouchers and focus on repaying any outstanding debts. These are all things which can free up some extra cash and help relieve the financial strain many households are currently facing,’ he added.

According to Hamptons International the stubbornly high rate of inflation is a concern for homeowners. ‘Despite this modest fall in headline inflation, most commentators expect the cost of living to increase at a faster rate than wages in the short term. This means that households are being squeezed at both ends, as many have also been forced to take salary freezes or cuts over the past couple of years,’ said a spokesman.

‘Planned tax increases in the new year, notably the VAT rise from 17.5% to 20%, will ensure that homeowners who are just managing to cover mortgage costs will be placed under even greater pressure to find savings elsewhere,’ he added.