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

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.



Shoppers

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.



Savers

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.”



Long-term investors

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

Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind the scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
News
Winchester College Football (universally known as Winkies) is designed to make athletic skill all but irrelevant
Life...arcane public school games explained
PROMOTED VIDEO
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
News
i100(and it's got nothing to do with the Great British Bake Off)
News
Angelina Jolie with her father Jon Voight
peopleAsked whether he was upset not to be invited, he responded by saying he was busy with the Emmy Awards
News
Bill Kerr has died aged 92
peopleBill Kerr appeared in Hancock’s Half Hour and later worked alongside Spike Milligan and Peter Sellers
News
news It's not just the world that's a mess at the moment...
Sport
footballPremiership preview: All the talking points ahead of this weekend's matches
News
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
people
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
News
i100
Sport
Mario Balotelli pictured in his Liverpool shirt for the first time
football
Life and Style
tech
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Data Scientist (SQL,Data mining, data modelling, PHD, AI)

    £50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

    SAS Business Analyst - Credit Risk - Retail Banking

    £450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

    Project Manager - Pensions

    £32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

    KYC Analyst, Birmingham - £200-£250 p/d

    £200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

    Day In a Page

    Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

    The phoney war is over

    Russian troops and armour pour into Ukraine
    Potatoes could be off the menu as crop pests threaten UK

    Potatoes could be off the menu as crop pests threaten UK

    The world’s entire food system is under attack - and Britain is most at risk, according to a new study
    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
    From Mozart to Orson Welles: Creative geniuses who peaked too soon

    Creative geniuses who peaked too soon

    After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
    Caught in the crossfire of a cyber Cold War

    Caught in the crossfire of a cyber Cold War

    Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

    Salomé: A head for seduction

    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
    From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

    British Library celebrates all things Gothic

    Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
    The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

    Is the Hard Rock Café worth fighting for?

    The restaurant chain's owners are currently embroiled in a bitter legal dispute
    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

    In search of Caribbean soul food

    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
    11 best face powders

    11 best face powders

    Sweep away shiny skin with our pick of the best pressed and loose powder bases
    England vs Norway: Roy Hodgson's hands tied by exploding top flight

    Roy Hodgson's hands tied by exploding top flight

    Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
    Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

    Di Maria and Ronaldo: A tale of two Manchester United No 7s

    They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone