UK savers see the value of their deposits shrink: Rising inflation wipes out interest on 94% of savings accounts
Increases in inflation are making it hard for savers in the UK to hold on to the value of their savings.
Cost of living increases were at an all-time high over the last two years with official figures from the Office of National Statistics showing revealing a price index rise to 1.6 per cent in December 2016, from the November figure of 1.2 per cent.
These figures mean that savings will be affected as only 6.5% of savings accounts now available are able to compete with and exceed levels of inflation. Moneyfacts is calling the current climate a ‘dreadful time to be a saver’.
All of the accounts that do beat inflation are fixed rate bonds, where money cannot be accessed for at least three years.
Rachel Springall, finance expert at Moneyfacts, explains: ‘With inflation expected to rise significantly over 2017, it is sadly going to stay a dreadful time to be a saver.
“It will be no surprise if we start to see savers sacrifice the necessity to make savings provisions for the future in favour of overpaying their debts, particularly as there is little interest to be gained on most savings accounts currently on the market.”
The ONS states: ‘The main contributors to the increase in the rate were rises in air fares and the price of food, along with prices for motor fuels, which fell by less than they did a year ago.”
Food price increases are central to rising KPI with vegetable prices placing overall food up by 0.8 per cent from November and December 2016.
The news comes after the big drop in sterling, amidst anxiety over Brexit – taking the pound as low as $1.21 against the US dollar in December 2016.
A huge 49 per cent rise flight prices between November and December was a factor in the 2.9 per cent jump in transport prices – overall.
The cost of living was also impacted by fuel prices - the price of petrol at the pump fell by 0.8p per litre to 114.6p in December 2016, while diesel stayed steady at 118p – however drops were more significant in 2015/16. This was a result of oil production slowdowns announced by the Opec cartel in November, with wholesale crude prices going from $49.09 US dollars per barrel to almost $54.86 US dollars per barrel by the end of December.
Prime Minister Thersa May will set out her 12-point Brexit plan in a major speech. However just after the data the pound was up 1.1 per cent at $1.216.
The inflation figure comes after a caution from Bank of England Governor Mark Carney last evening, stating that there are “limits to the amount of inflation the central bank will tolerate.”
The Bank’s first Monetary Policy Committee meeting of the year will take place on the 2nd of February.
CPI inflation rate over the last 10 years – from December 2006 to December 2016:
Chris Williamson, analyst at IHS Markit, stated: “Inflation looks inevitably set to rise further in 2017, with 3 per cent likely to be seen by the second half of the year.”
“Whether the central bank will tolerate this level of inflation remains very uncertain, but will most likely depend on the extent to which consumers continue to spend in the face of Brexit worries and higher prices.”
“At the moment, there seem to be few signs of any waning in households’ appetite to spend, but we suspect that spending will soon slow as the reality of higher prices starts to bite.”
Tom Stevenson, investment director for Personal Investing at Fidelity International, added: “Inflation is back with a vengeance.”
“The weakening pound continues to drive prices higher and today’s CPI reading of 1.6 per cent on the back of rising fuel, food and air fares is significantly higher than expected.”
“With more hints from the UK Government that a hard Brexit is on the cards, we could see sterling fall even further in the lead up to the Prime Minister pulling the trigger on Article 50.”
“This will translate into further inflation in the short term. Indeed, some of Britain’s biggest retailers have already warned that they may have to raise prices as they are forced to pass on higher costs of importing goods from abroad to customers.”