This week, the Bank of England’s Monetary Policy Committee (MPC) voted, for the 9th time on the trot, for a hike in the base rate – this time by 0.5%. The base rate is now at a 14-year high of 3.50%, although not all the members of the MPC voted for a rise, illustrating that we could be nearing the end of the interest rate increases. Six of the members voted for the 0.5% rise, while one member wanted it to be 0.75%. However, two of the committee, Silvana Tenreyro and Swati Dhingra, voted for no change.
This hike follows the news that the rising cost of living eased slightly in the 12 months to November 2022 – although the Consumer Prices Index (CPI) shows that on average prices rose by 10.7% over the year. So, price rises have eased but are still going up at a much faster pace than is targeted. The government target is 2%, so the current level is still more than five times higher.
What is keeping inflation so high?
Food prices are still rising significantly – up 16.5% over the 12 months to November 2022.
And although the price of fuel at the petrol pump has fallen from record highs, which has been highlighted as one of the key reasons that inflation has eased slightly, this was offset by a rise in the cost of alcohol in restaurants, cafes and pubs, particularly whisky, wine and gin. If you find yourself as the designated driver more often than not, then your inflation rate may be a little healthier than others. That said, the cost of non-alcoholic drinks was also one of the largest upward contributions to this latest inflation rate.
And what has caused inflation to ease slightly?
As mentioned above the cost of fuel over the last 12 months has risen by less than it did in the 12 months to October 2022 – up 17.2% to November, compared to 22.2% in the 12 months to October. It’s risen less but it’s still a big contributor to the CPI headline rate.
But the price of secondhand cars has actually fallen by 5.8% in the year to November 2022 compared with a fall of 2.7% in the year to October. However, although this is the eighth consecutive month for the annual rate to ease and prices have now fallen by just under 6% between March and November this year, we can’t forget that prices rose by 31% between March and November 2021. This was due to increased demand following the Covid pandemic and a global shortage of semiconductor microchips affecting new car production, resulting in more people switching to the second-hand market.
For smokers, tobacco prices rose by just 0.1% in November, compared to 4.2% a year ago when duty rates were increased, so this was another contribution of the easing of the CPI.
However, as this summary illustrates, while some items have fallen in price, mostly it’s a case that they are simply rising by a lower rate than they have previously – which is why the cost of living is still rising.
But there may be light at the end of the tunnel?
Bank of England Governor, Andrew Bailey, told Sky News “We think we’ve possibly seen the first glimmer, with the [inflation] figures released this week, that it’s not only beginning to come down but it was a little bit below where we thought it would be.
That’s obviously very good news, but there’s a long way to go.”
Many economists are predicting that inflation will fall sharply next year, but Bailey went on to say “We expect inflation to start falling more rapidly, probably from the late spring onwards.
But there is a risk that it won’t happen in that way, particularly because the labour market and the labour supply in this country is so tight.
And that’s why, really, we had to raise interest rates today, because we see that risk as really quite pronounced.”
What can savers do?
Of course this increase to the Bank of England’s base rate should mean more saving rate rises for cash savers, if the banks and building societies pass on at least some of this latest rise. It’s too early to say yet but we already know that some providers are better than others when it comes to treating their customers fairly.
I was asked by the BBC to summarise in 45 seconds a top tip for savers as we head towards the end of an interesting year – this is what I said…
“The Bank of England base rate has increased in every Monetary Policy Committee meeting over the last year – that’s nine times in a row. In total it has risen by 3.4% - from 0.1% to it current level of 3.5%. As a result, although variable rate accounts as a whole have not seen the full benefit, and some providers have definitely been better than others at passing it on, far better rates can be found today.
Just before the first base rate rise in December last year, the best easy access account was paying 0.71% - today you can earn as much as 2.85%. On £50,000 that means earning £1,425 over 12 months, rather than £355.
Fixed rate bonds have increased by even more – if you have a bond maturing now that you opened a year ago the interest you can earn now will be more than 200% higher than the best rate last year – 4.26% rather than 1.39%.
So if you have not already done so, then now’s the time to review what you are earning on your savings and switch if you can earn more elsewhere – it’s an easy way to put more money in your pocket.”
@savingschampion
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