The latest inflation figures are out – and to the surprise of some they’re down on the previous month by a reasonable 0.50%. The latest Consumer Prices Index (CPI) rate is 2% in the 12 months to July 2021- down from 2.50% the month before and while some experts were predicting a fall, the size of the reduction has been a bit of a surprise.
This means that inflation is back to being at the Bank of England’s 2% target, after being higher for two months in a row. And it’s dipping at a time that many predicted inflation could spiral, causing more misery for downtrodden savers.
While this would seem to be good news for savers, unfortunately there are still currently no new savings accounts that beat, or even match the rising cost of living, so what can you do? With the effects of inflation eating into your money, it’s wise to make sure that your hard-earned savings are losing as little money in real terms as possible.
Just how damaging can inflation be?
Although we have not seen the Bank of England announce negative interest rates, when inflation is higher than the return you are getting on your money, it’s a negative rate in all but name.
On a deposit of £50,000, assuming an inflation rate of 2%, after five years the real value of your money will have fallen to £45,287 if no interest is earned. If your money is in a high street bank earning 0.01% unsurprisingly it won’t fare much better – your £50,000 might appear to have increased to just over £50,025 after five years assuming interest is rolled over each year– but actually the real value will have fallen to £45,309.
Why has inflation fallen?
The dip in inflation came mainly from a fall in the price of clothes and footwear, with plenty of sales occurring over the summer – but also games, toys and hobbies, as well as package holidays have fallen in price since the 12 months previous.
Those who drive cars, however, will feel the effect of a pretty hefty rise. A year ago, the average petrol price was 111.4p per litre. In July this year it was 132.6p – the highest price since September 2013.
Sadly experts are predicting that this will be a short respite with further rises in inflation expected to be just around the corner. The temporary cut in VAT for the hospitality sector will be ending soon and this hike in costs could well be passed on to customers. In addition, the energy price cap is set to be increased in October - just in time for the cold weather. According to reports, the typical gas and electricity customer is likely to see their bill rise by £139, to £1,277 a year.
So, what can I do now with my cash?
With inflation expected to rise again later in the year, it’s important that savers don’t leave too much languishing in cash and with the money they do leave, it makes sense to help it earn as much as possible in order to keep the gap between the rising cost of living and savings rates as small as possible.
The good news is that we continue to see some increases to Best Buy savings accounts which can help those who are prepared to shop around in order to make their cash work as hard as possible, and at least mitigate some of the damaging effects of inflation.
Choosing the best rates can help.
If, instead of leaving the money in a poorly paying account, you were to choose the best easy access account paying 0.65%, when compared to the example above your £50,000 would have grown to £51,646 in physical terms and after inflation has been taken into consideration, although it would be still worth less in real terms, it would be worth £46,778 – so almost £1,500 more.
Better still, if you don’t need access to your cash you can narrow the gap even more as fixed rate bonds are paying between 1.35% for 1-year, to as much as 1.72% for 5 years.
Who is offering the best rates?
We recently wrote about the increase of the rates on best buy easy access accounts. Although the average rate of these accounts is still falling, which indicates that cuts are still being made, the good news is that yet another best buy easy access account has launched straight into the top spot of our Best Buy table, although once again, as we’ve highlighted in the past, it’s not entirely straightforward.
The new Tandem Green Instant Access Saver can only be opened via the Tandem app on a smartphone or tablet, so might not be right for everyone. On the plus side, as well as offering the best rate on the market, it also does not restrict the number of penalty free easy access withdrawals that can be made each year. And with a rate of 0.65%, it’s the highest rate we’ve seen since November 2020.
For those who don’t necessarily need immediate access to their cash, best buy notice accounts and fixed rate bonds have been on the increase too – and you can now earn 1.35% if you can tie up some of your money for 12 months. Competition has been fierce recently, as illustrated in our Rates Rundown, which is good news for savers. At the time of writing, it’s Allica Bank paying the top 1-year rate of 1.35% AER, with Investec Bank taking the next spot with a marginally lower rate of 1.33% AER.
The 5-year bond paying 1.72% AER mentioned above is from SmartSave, an online only provider – and the highest 5-year rate we’ve seen for more than a year.
And finally, don’t forget options outside of cash. Depending on your risk appetite and when you might need to access your money, there could be options that could help you improve your wealth rather than letting inflation eat away at what you have. Cash is always king for many and certainly for accessible money, but for everything else at times like this, it’s sensible to look at all the options available to you.
If you’re worried about rising inflation and think you might be holding too much in cash, perhaps you'd like to explore other options, so why not get in touch. We’re currently offering all those with £100,000 or more in savings, investments or pensions a FREE financial planning review with one of our TPO colleagues, worth £500. You can find out more here.
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