News that the Consumer Prices Index rate of inflation dipped back from 4.4 per cent to 4 per cent in March may not bring much relief to the UK’s savers.
Data from the Office for National Statistics (ONS) showed that there was a surprise fall in the cost of living last month.
The drop, to 4 per cent from February’s 4.4 per cent, was the first since July of last year.
The main drivers behind the decline were significant falls in the price of food and drink, defying predictions among analysts that CPI inflation would climb to as high as 5 per cent in March.
The new figures should dampen calls for the Bank of England to move interest rates up in response to spiralling prices. But even at 4 per cent, the rate of inflation is double the target set by the Treasury and has now been above target for 16 consecutive months.
Last month also saw an improvement in the Retail Prices Index of inflation which eased down from 5.5 per cent to 5.3 per cent. The RPI takes into account mortgage interest payments.
Despite the drop, there is still a worry that the respite may only be temporary, with hikes in energy costs yet to exert further upward pressure on the cost of living.
Consumers are already reining in household spending in the face of job losses and wage freezes, and higher inflation is simply adding to the squeeze on disposable incomes and is eroding spending power.
However, the Bank of England is under pressure not to increase the cost of borrowing – which is one way of moderating price rises – given the weakness of the economic recovery and the dangers of increasing the cost of credit to businesses.
Opponents of an official interest rate rise point to suggestions that the spike in inflation is contingent rather than long-term and that wage increases, which are subdued, are unlikely further to fuel prices.
The fall in inflation, whatever its impact on the wider economy, may not deliver much-needed relief to beleaguered savers, industry experts have warned.
Even factoring in the fall in CPI inflation, basic rate taxpayers must seek out a savings account delivering interest of 5.01 per cent in order to counter the effects of inflation and tax. Higher rate taxpayers need accounts promising 6.67 per cent.
According to Moneyfacts, the financial information website, basic rate taxpayers can only choose from 25 accounts that negate the effects of tax and inflation. Sylvia Waycot of Moneyfacts said: “Whilst a fall in inflation is welcome, it won’t change the fortunes of the nation’s savers who are still battling against shrinking spending power and a lack of inflation-beating savings accounts.
“CPI is still double the government’s 2 per cent target, which spells desperate times for savers who have almost nowhere to place their money to beat inflation. Pensioners trying to supplement their income with interest will feel the ensuing pain the most.”
Moneysupermarket.com, another finance website, suggested that one in five people save less than they used to because of the rising cost of living.
Head of banking at moneysupermarket.com, Kevin Mountford, said: “With cuts in benefits, rises in national insurance contributions, the lowering of the higher rate tax threshold and the general increase in the costs of living, many Brits are feeling the squeeze. Unfortunately, savings become one of the first casualties when people have to tighten their purse strings.”
Andrew Hagger, of moneynet.com, confirmed the ongoing misery for savers: “To get 5 per cent savers need to tie their cash up in a fixed-rate bond for five years. It remains a very tough environment for savers still battling against the crippling combination of low rates and high inflationary pressures.”
