Further misery for savers as inflation hits 3.7%

UK inflation is up again as experts warn it could mean a sooner than expected rise in the Bank of England’s base rate. The Consumer Price Index rose 0.4% to 3.7% during December, according to figures published today (Tuesday January 18).

It means that to beat inflation a basic rate tax payer at 20% needs to find a savings account paying 4.63% per annum, while a higher rate tax payer at 40% needs to find an account paying at least 6.17%.

The rise in inflation will hit those who rely on their savings to supplement their income the most, in particular pensioners, according to Moneyfacts.

The average savings interest rate payable to a basic rate tax payer, currently 0.83%, is in effect being eroded by 3.06% per year. To highlight just how average savings rates have struggled to keep up with inflation; savers who invested £10,000 in January 2008 would now have the spending power of just £9,516, the company said in a report.

‘Savers who have been struggling for many months to achieve a competitive return on their funds will be severely disappointed by yet another rise in inflation,’ said spokesperson Louise Holmes.

‘Basic rate tax payers need to earn 4.63% per annum to maintain the purchasing power of their savings, while higher rate tax payers at 40% need to earn 6.17%, attainable on only a handful of products. Over recent weeks some providers have raised easy access rates, but they are still too low to battle the effects of inflation,’ she explained.

‘Typically, cash ISAs and longer term fixed rate bonds tend to offer the best rates for savers trying to beat inflation. However, with interest rates predicted to rise by the end of the year, many investors are reluctant to lock funds away for a long period of time,’ she added.

Soaring inflation looks set to continue for the foreseeable future and it increases the likelihood of Base Rate increase before June, according to moneysupermarket.

The increase in CPI means this inflation measure has been above the Bank of England’s own target of 2% for 13 consecutive months and the longer this continues, the greater chance of the monetary policy committee being forced to increase Base Rate. Although this will spell better news for savers, it will be bad news for borrowers.

Anyone who had £10,000 in a saving account paying an average rate of 0.19% would have lost £331 as a result of inflation during 2010. No savings accounts currently beat the effect of inflation and taxation, said moneysupermarket.

Any borrowers who are concerned about interest rates risings in the next few months may want to consider fixing their mortgages in order to protect themselves against any rise, said head of banking Kevin Mountford.

‘With increases in VAT and soaring petrol and commodity prices throughout the world, it is likely that inflation will increase further before it falls and this can only lead to pressure on the MPC to increase the Base Rate in order to tackle the problem,’ he explained.

He added that the rising cost of living has led to one in four consumers being forced to stop saving this year, with many more not bothering to make sure their savings are getting the best returns possible.

‘However, instead of giving up all together, savers should be doing as much as they can to offset the rate of inflation. Savers really need to keep a close eye on their interest rate, especially on fixed term accounts where rates may come crashing down after the term ends,’ he said.

‘Savers should also utilise their tax free Cash ISA allowance of £5,100 and with an overall ISA allowance of £10,200 per tax year, stocks and shares ISAs may also be an option for some savers,’ he added.