Soaring inflation looks set to continue for the foreseeable future
Today's announcement by the Bank of England on the increase in inflation to 3.7 per cent spells further bad news for consumers, with the situation unlikely to get any better in the near term. Following the recent increase in VAT, soaring petrol costs and low saving rates this announcement is a further heavy hit on people's finances, according to moneysupermarket.com.
The increase in the Consumer Price Index (CPI) means this inflation measure has been above the Bank of England's own target of two per cent 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 Britain's borrowers.
moneysupermarket.com urges savers to protect their hard-earned cash by doing as much as possible to ensure their savings pot is not eaten away by inflation, rather than to stop saving all together, as many may resort to. Anyone who had £10,000 in a saving account paying an average rate of 0.19 per cent would have lost £331 as a result of inflation during 2010. Basic rate tax payers will now need an account paying at least 4.63 per cent to gain benefit in real terms from their savings, increasing to 6.17 per cent for higher rate tax payers. No savings accounts currently beat the effect of inflation and taxation.
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.
Kevin Mountford, head of banking at moneysupermarket.com, said: "For the past thirteen months we have seen inflation running at a much higher rate than the Bank of England's own inflation targets. 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. The rising cost of living has led to one in four consumers (25 per cent) 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. 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.
"In the current low rate environment, many may think it is easier to stick with their existing savings provider, however it is more important than ever to consider switching to the best paying account in order to make their money work harder. There is a great deal of headroom between the average rates and leading rates. The best paying easy access account is the Post Office account paying 2.9 per cent. Today's inflation rates should encourage a rise in Base Rate, and some are suggesting this will be early this year, which would mean better news for savers, but bad news for borrowers.
"People should be doing everything they can to lessen the effects of the current economic environment. Spending wisely, using discount vouchers and shopping around to make sure you are getting the cheapest deals on your borrowing and household bills all stand consumers in good stead."