Alarm bells went off for savers today after news that inflation rose to its highest level in nearly three years for the fourth straight month.
Inflation, as measured by the consumer price index, rose from 2.1 percent in May to 2.5 percent in June, reflecting price increases for food, clothing, used cars and motor fuel.
The rate, which beat analysts’ expectations of 2.2 percent, means inflation is now even further above the Bank of England’s target of two percent.
Inflation reached 2.5 percent in June, the highest level since October 2018. Just a few months ago, it was 0.4 percent.
Jonathan Athow, deputy national statistician for economic statistics at the ONS, said: ‘Inflation has risen for the fourth straight month to its highest level in nearly three years.
“The increase was widespread – for example due to price increases for food and used cars where there are reports of increased demand.
Some of the increase is due to temporary effects, for example rising fuel prices, which continue to increase inflation, but much of this is due to prices recovering from lows earlier in the pandemic.
“An increase in clothing and footwear prices, compared to the normal seasonal pattern of summer sales, also contributed to the upward pressure this month.”
What does this mean for savers?
With the continued rise in inflation, the outlook for savers looks bleak, at least in the short to medium term.
There is currently no savings account that can surpass the eroding force of inflation, and many commentators predict the worst is yet to come.
According to the Bank of England, savers currently have £1.7 trillion locked up in bank accounts, fueled by record levels of savings over the past year.
The average easily accessible account pays just 0.17 percent interest, according to Moneyfacts, although most major banks pay even less — often between 0.02 percent and 0.06 percent.
Based on the current average easy access fee, if you saved £10,000 today, you could expect to pay £10,085.36 after five years.
But if inflation averaged 2.5 percent over the next five years, the sum would be worth £8,886 in real terms. The real interest rate on such an account would be minus 12 percent, as the purchasing power of nominal cash is eroded over the course of five years.
Even those willing to put their money away in a fixed-rate deal for up to 12 months can earn up to 1.1 percent — less than half the rate of inflation.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “Most people don’t think it’s worth switching because rates are so low right now.
“That’s why most of our savings are still in easily accessible accounts, with the big giants earning 0.01 percent.
‘However, you can generate 50 times the interest in the most competitive easy access accounts and you have to wonder what the alternative is.
“If you sit and wait for your bank to offer you more, you can wait a long time, because the market expects the Bank of England to keep interest rates at 0.10 percent until 2023.”
For those who are saving for the long term and may feel like they don’t need access to their money in the meantime, investing can be the best solution.
“Once you have an emergency savings fund of 3-6 months of essential expenses, and cash to cover the next five years of planned expenses, for any amounts you won’t need for 5-10 years or more, it’s worth considering.” if you could invest some of it,” Coles said.
“There is a risk to this, and the value of your investments will rise and fall in the short term, but at least it has the potential to grow faster than inflation.”
Used car boom: Prices have risen as demand from locked-down savers is slowing down the supply of cars on the market.
Is there hope for savers?
The Bank of England expects inflation to continue rising this summer, reaching 3% before falling back. The question is whether at any time the Bank’s monetary policy committee deems it appropriate to raise interest rates to get inflation back on track.
That would at least encourage banks to offer better rates. However, there are no signs that key interest rates will rise any time soon.
The MPC does not want to choke the economic recovery from the pandemic and the economy is still seen as weakened by Brexit.
“We’re still stuck in an inflationary limbo where we can’t tell whether rising prices are a statistical blip, or a more worrisome and permanent feature of the global economic recovery,” said Laith Khalaf, financial analyst at AJ Bell.
“It’s not so hot this side of the Atlantic, with inflation in the UK still only about half the rate in the US.
Nevertheless, the direction and speed of travel is worrying, when you consider that inflation in the UK was as low as 0.4 per cent just a few months ago.
Despite escalating inflation, savings rates have improved slightly in recent weeks, offering some rescue to savers.
No fewer than 300 rate increases have been registered in the past month. According to the website Savings Champion, there were 90 gains in easy-access accounts, fixed-income bonds and cash Isas last week.
James Blower, founder of The Savings Guru said: ‘Flat rates have risen sharply since April, where the best buy for 1 year was 0.56 percent, compared to 1.10 percent today, with six providers now offering 1 percent or more. Pay.
“If you’re a saver and you haven’t looked at your rate or provider recently, check what you’re earning, because if you haven’t moved in the past three months, chances are there’s a better deal out there.
“Even the easy access rates are up 25 percent from their lowest rate of 0.40 percent and there are now five providers paying 0.50 percent.
“I think we’re still seeing small increases from where the rates are now, but no significant changes.”
However, Blower expects bigger increases in fixed-rate Isa deals as competition between providers increases.
Blower said: “While Isas typically pay less than their standard savers, the gap between fixed-income bonds and fixed-income Isas is now too wide and we will see more competition in Isas in the coming weeks.
“Isa savers should definitely keep an eye on the rates, because I think we will see more increases this month.”
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