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Rise in inflation to hit savings accounts. Pearson May News Update - Wednesday 20 January
Rise in inflation to hit savings accounts
Savings accounts are likely to deliver lower returns after December’s rise in the annual rate of inflation.
According to the Office for National Statistics, the Consumer Price Index for December stood at an annual rate of 2.9 per cent, up from 1.9 per cent in November.
The figure represents the largest single-month jump in the annual rate of inflation since records began.
The main reason for the hike is that depressed oil prices, the reduction of the VAT rate to 15 per cent and high street discounting all conspired to keep prices low in December 2008. Some of those dampening effects have now been lifted.
As a result, inflation is set to have a knock-on, adverse effect on the level of returns that savings accounts deliver, at least in the short term.
For basic rate taxpayers to gain a real return on their money, they will require an account that pays a minimum of 3.63 per cent interest. For higher rate taxpayers, that figure climbs to 4.84 per cent.
Taking the latest inflation rate and tax into consideration, the actual return on an average no notice savings account is currently -2.30 per cent.
According to moneysupermarket.com, the comparison site, not one of the 261 easy access accounts for funds of £1,000 pays sufficient interest rates to counterbalance both inflation and tax.
For regular savers, the news is a little better: 14 of the 42 regular savings accounts offer interest higher than 3.63 per cent and two deliver rates higher than 4.84 per cent.
Kevin Mountford, head of banking at moneysupermarket.com, said: “It’s vital savers keep a close eye on how their account stacks up. Inflation was dwindling for much of last year but the numbers show it’s very much back on the agenda, and savers really have to be proactive to find the right deal.
Darren Cook, of moneyfacts.co.uk, added: “Inflation is starting to make its unwelcome mark on people’s spending power, and with savings interest rates stuck at their historical low, there is little that savers can do to fight back.
“Savers need to secure a gross return on their savings of at least 3.63 per cent to break even. Higher rate taxpayers need to achieve the near impossible, by trying to find savings rates that return at least 4.84 per cent.”
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