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.


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, 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.”


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

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

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