Savers hit as inflation remains high

The Consumer Prices Index (CPI) measure held steady at 3.1% in August, the Office for National Statistics (ONS) says; far higher than the 2% target and above City expectations.

The Retail Prices Index measure (RPI), which includes housing costs, fell marginally from 4.8% in July to 4.7% last month.

If the cost of living continues to rise at this speed, savers will struggle to keep pace which means the true value of their nest eggs may fall (see the Top Savings guide).

Even if you find a rate higher than 4.7%, remember, unless it's in a cash Isa it's likely any interest will be taxed which diminishes the return.

How does inflation impact savings?

The idea of saving money is to keep it for a rainy day or a special purchase, but also to make that cash grow by as much as possible.

What you don't want to happen is for your cash to lose value. While it may grow even on a 0.01% interest rate, if prices rise by 4.7% in the coming year, your cash will buy you a lot less in 12 months than it does now.

Imagine you've £1,000 in the top 2.8% instant access savings account, after (basic rate) tax you'd have £1,022.40 in a year – as you've earned £22.40 interest.

Now suppose that £1,000 is enough for ten weekly supermarket trips. If prices rise by 4.7% next year, you'd need £1,047 to buy the same goods.

So although your savings might have grown, the impact of inflation means what you can buy with it has decreased.

Current inflation

The largest upward pressure on inflation in August came from air transport, where fares rose by a record 16.1% between July and August.

A 2.8% hike in clothing costs from July to August, the largest rise for the period since 2001, and a 0.1% increase in food prices across the period also had an upward effect.

But falling petrol costs and lower second-hand car prices over the month – in contrast with a steep rises a year earlier – meant CPI didn't move overall.

The same factors had a similar impact on RPI.

Food prices and the hike in VAT to 20% at the beginning of next year are expected to put further pressure on inflation, although this should be offset by the impact of Government cost-cutting which could reduce household spending.

ING economist James Knightley expect inflation to fall below 2% for most of 2012.

Additional reporting by the Press Association.

Further reading/Key links

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