Fighting rising inflation is essential for savers
Prices are accelerating at an almost unprecedented rate and savers with money in the bank must be alert to the dangers. Rob Griffin reports
Saturday 29 May 2010
Inflation is on the rise again and, if it continues to climb, will have a massive effect on everyone. The definition of inflation is an upward trend in prices that is fuelled by an expansion in either demand or money supply. The latest official figures make worrying reading for both savers and spenders alike.
While the Consumer Price Index (CPI) accelerated in April from 3.4 per cent to 3.7 per cent, the Retail Price Index (RPI) jumped from a relatively modest 4.4 per cent to a 19-year-high of 5.3 per cent. These increases are attributed to significant price rises in areas such as clothing and footwear, personal care, transport, insurance and financial services, as well as more modest increases in restaurant and hotel bills.
The Governor of the Bank of England, Mervyn King, has warned that inflation is likely to remain above the Government’s target this year, but he predicts it is likely to fall back next year as inflationary factors wane. "It reflects the temporary effects on inflation of the restoration of the standard rate of VAT, the increase in oil prices and the continuing pass-through from the exchange rate depreciation,” Mr King explained in a recent report.
However, David Kuo, director of the financial advice website The Motley Fool, is not reassured. The monthly inflation data for April may provide only a quick snapshot, but eight successive snapshots point to something else, he argues.
"Prices are accelerating at an almost unprecedented rate,” he says. "The UK has swung from deflation in early 2009 to inflation rates that have not been seen since 1991. Savers must be alert to the dangers of inflation.”
So how are different groups affected by inflation – and what can be done to combat its effects?
Who will be affected?
Everyone in Britain will be hit, either positively or negatively, by increases in the inflation rate. Investors will find growth limited, while shoppers will pay more for the same goods.
According to Darius McDermott, the managing director of Chelsea Financial Services, this means longterm investments need to be earning a return that is substantially higher than inflation, or the value of your money will decrease. "Inflation erodes your investment. If it was at 4 per cent and cash is at 5 per cent, then your real increase is just 1 per cent,” he says.
Not everyone is affected in the same way by inflation; it depends on what investments you have and how you spend your money. The latest data from the research centre at Alliance Trust, a self-managed investment company, suggests that people aged 50 to 64 faced the highest rate of inflation in April – 5 per cent – for the seventh consecutive month. Those under 30 had the lowest rate (4.4 per cent) with 65 to 74-year-olds next on 4.5 per cent and 30 to 49-year-olds on 4.8 per cent.
According to Shona Dobbie, of Alliance Trust, the fact the 50 to 64 age group has a higher rate of inflation is largely because older people spend relatively more of their disposable incomes on transport.
"Inflationary trends have increased sharply this month, partly due to the increase in excise duties on tobacco and the rise in fuel prices,” she adds. "Tobacco price inflation is running at more than 9 per cent and petrol prices have risen by almost 25 per cent over the past year.
When inflation rises, it increases the pressure on shoppers to make sure they get the best deals. So make sure you do your homework by going online to find the best prices and bargaining as hard as you can. The same applies for gas and electricity suppliers, and mobile phone companies.
To stop their savings pot effectively beingeroded, basic rate taxpayers need to find an account paying 4.63 per cent, while those on the higher rate need at least 6.17 per cent, according to Darren Cook, of the Moneyfacts website. "Rises in the rate of inflation continue to antagonise savers, who are already struggling to achieve competitive rates of return on their money,”he says. "Prudent savers are being left out in the cold and are finding it nearly impossible to combat the effects of tax and inflation.”
That’s easier said than done. None of the 257 easy-access savings accounts for balances of £1,000 pays enough interest to offset the effects of inflation and tax, according to Moneysupermarket. com. Even the best payer – the Coventry Building Society’s First-Class Postal Account – offers just 3 per cent.
Kevin Mountford, head of banking at Moneysupermarket.com, says it is essential for savers to keep a close eye on interest rates – especially on fixedterm products – and to make full use of Isas. "Many will do nothing because they believe there is little point, but this is not the time to be apathetic,” says Mountford. "Rather than doing nothing, it is more important than ever for savers to proactively seek the best returns possible.”
Justin Modray, founder of the Candid Money website, says the safest way to beat inflation is by taking out Indexlinked Savings Certificates offered by National Savings & Investments. "Theypay tax-free returns of 1 per cent above inflation (measured using the RPI) over three or five years, equivalent to 10.5 per cent gross for higher rate taxpayers with RPI at 5.3 per cent,” he explains. "The return is calculated monthly, so it could fall if RPI falls, but even if inflation becomes negative you will still receive the 1 per cent return.”
Then there are index-linked gilts. In exchange for lending money to the Government, you receive a fixed rate of interest over a predetermined period. The difference between these and conventional gilts is that both the coupon and the principal are adjusted in line with the RPI. This means both will take into account inflation since the gilt was first issued.
However, these products will not exactly set the world alight, points out Geoff Penrice, an adviser at Honister Partners. He suggests people consider a range of fixed-interest products, property and equities. "There are also alternative assets such as commodities and wine which have tended to give returns above inflation.”
While, on average, shares increase in value, this is certainly not guaranteed. Also, investing at the wrong time – such as putting all your money in one asset class just before a crash – can wipe out every penny overnight.
"It can take many years to recover in real terms, as we know because the FTSE is still below the peak of early 2000 and the residential property market took 14 years to recover from the boom and bust in the late 1980s,” adds Penrice. "The solution is to invest across a wide range of assets to reduce the risk of any one of them falling.”
It is also important to diversify within asset classes. "I would tend to consider actively run multi-asset funds such as Jupiter Merlin Growth, which has returned 65 per cent over the last five years and 90 per cent over the last 10,” he adds.
Another area you might consider is physical gold. Andrew Merricks, head of investments at Brighton-based Skerritt Consultants, explains: "Gold is seen as a hedge against future inflation because it tends to keep its value, and the way I would suggest people buy it is through an exchange-traded commodity. It means you are buying a bit of gold in a vault somewhere, which is much easier than buying a gold bar, sticking it in a safe and having toworry about insuring it.”
THE UPS AND DOWNS OF THE ECONOMY
How is inflation measured?
The rate of inflation is measured in two ways using the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). Each month these figures are published by the Office for National Statistics.
The CPI is a macro-economic measure of consumer price inflation which has been developed to internationally agreed rules. It forms the basis for the Government’s inflationary target, which the Bank of England’s Monetary Policy Committee is required to achieve. The RPI is probably the more familiar measure of inflation in the UK and is normally used for wage bargaining. Observers claim it is also a more realistic measure for consumers because it includes expenses such as council tax and mortgage interest payments, which are excluded from the CPI.
The real rate of inflation
The CPI and RPI give a broad indication of the effect of price movements, but it is now possible to get a personalised inflation report to see whether you are better or worse off than your peers via the ONS website at www.statistics.gov.uk/pic/
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
Nigel Farage's approval rating hits 'record low' as popularity suffers in wake of Ukip sex scandal
Nigel Farage defends Kerry Smith 'ch***y' comment: 'If you are going for a Chinese, what do you say you’re going for?'
Pakistan school attack live: Taliban kill at least 132 children in 'horrifying' massacre
Sony hack: Angelina Jolie branded 'seriously out of her mind' in further embarrassing leaked email saga
Panic Saturday: 13 million Britons spend £1.2bn – while 13 million others across the country live in poverty unable to afford food
iJobs Money & Business
$200 - $350 per annum: Carlton Senior Appointments: Managing Producer Office...
$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...
Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens