Inflation rate rises, ruins the day of many a saver

Business banking news review: week ending 15 Nov 2012

With the cost of living increasing this week, a nation of already beleaguered savers are fit to be tied as the returns on their savings products face erosion.

Inflation as measured by the Consumer Prices Index jumped by a massive 0.5 percentage points for the month of October, rising to 2.7 per cent for the year. Worse than that was the Retail Prices Index, an inflation measure that takes into account the cost of mortgages and other housing, which rose from 2.7 per cent to 3.2 per cent.

Soaring inflation means that savings accounts need to work all that much harder to actually provide any returns at the end of the year. With the RPI so high now, unless you have a pre-tax interest rate on your savings product of 4 per cent, you won’t even break even if you’re a basic rate taxpayer, and if you pay the higher rate you’ll have better luck teaching a pig to fly than finding a pre-tax savings account that holds a 5.33 per cent interest rate.
Of course, even the top paying easy access saver is nowhere near that 4 per cent interest rate and instead holds steady at about 2.5 per cent before taxes. With interest falling below inflation once again, the best a saver can hope for after the end of a year is for a £1000 deposit to be worth closer to £988 in real money after the effects of inflation are taken into account.

Long term savings products or tax free ones such as cash ISAs can do little better.  The best cash ISA available currently is only around 3 per cent – still under that 3.2 per cent threshold, and fixed rate bonds are only inflation-beating if you leave your cash tied up for as long as five years!

Inflation had been on its way down for several months prior to the increase between September and October. The culprits are understood to be university fee hikes, utility cost increases, and rises in the price of assorted foodstuffs.

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