Who would have thought that the humble cucumber was so popular! But the shortage in salad items including cucumbers, tomatoes and peppers has contributed to a surprise increase in UK inflation over the 12 months to February 2023.
The latest data from the Office for National Statistics (ONS) saw the Consumer Prices Index (CPI) leap to 10.4%, from 10.1% in January – a shocking statistic given that most commentators were expecting inflation to have fallen back into single digits.
But ongoing supply chain disruption and extreme weather in Spain and North Africa have affected the harvests of many of these items. The rising cost of production has also helped to push food inflation to 18.2% in February, a 45-year high. And if you think that 18.2% sounds high, remember that is the average. Low-fat milk has increased by over 42% and olive oil has increased by almost 41% over the last year. On the flip side, the price of sweet potatoes has risen by just 2.4%. So, depending on what goes into your shopping trolley, your personal food inflation rate could be very different.
Food wasn’t the only driver of higher inflation. Alcohol prices in restaurants and pubs rose significantly pushing inflation up for those who go out regularly.
What about the Bank of England base rate?
Before the inflation figures were announced on Wednesday morning (22/3/23) the markets were split 50/50 between expecting a base rate rise and the Bank of England pausing its economic tightening amid fears that another banking crisis could be around the corner following the collapse of Silicon Valley Bank and Credit Suisse.
However immediately following the ONS announcement, the expectation of a 0.25% base rate hike increased to a 95% chance and in the US, the Federal Reserve upped the base rate by 0.25% on Wednesday (22/3/23). As so often is the case, if the US sneezes, the rest of the world often catches a cold.
The markets proved to be right and the Monetary Policy Committee (MPC) today announced the 11th base rate hike in a row – up a further 0.25% from 4% to 4.25%. This is the highest the UK base rate has been since October 2008.
What can savers expect?
Well, the hike in inflation is not good news as it means that the prices of things we buy are still increasing sharply, although, as suggested above, some different choices can help to minimise your personal rate of inflation.
But on the flip side, another base rate rise should mean more interest rate increases on our variable rate savings accounts. As our Rates Rundown illustrates, competition has been pretty strong recently and short-term fixed rate bonds rates have been increasing recently, so there are some decent interest rates to be found if you shop around.
Of course fixed term bond rates are not as closely linked to the base rate changes as they happen – they are priced on how the markets expect the base rate to fare going forward, but competition can also play a part.
The effect of high inflation can be extremely damaging to cash savers. With inflation at 10.4%, those with cash sitting in their current account earning nothing could see their hard-earned cash halve in the real value – so its spending power - in just seven years!
It remains vital for savers to choose the highest-paying accounts to try and mitigate the effects of inflation.
Based on the current CPI rate of 10.4%, if you leave your funds languishing with one of the worst paying easy access accounts - Virgin Money’s Everyday Saver is paying just 0.25% - a deposit of £50,000 would have fallen to just £45,403 in real terms in just one year.
If you were to choose the best easy access account available today, paying 3.40% AER, while the real value of your money would still be much lower, it would be worth £1,427 more, at £46,830. Better still if you earn the best 1-year rate available today paying 4.50% (Al Rayan Bank), it would be worth £1,925 more at £47,328. Would you say no, if someone offered to give you that sort of money for half an hour of your time, which could be all it takes to move your cash from one provider to another?
See how inflation is affecting your cash savings. We’ve done all the hard maths for you, so all you have to do is use our calculator below to see just how much your savings will be worth in 1 year, 3 years and into the future if inflation remains this high. In just a minute, you can see what the real spending power of your savings could be if you stick or twist!
While there are no savings accounts that are currently available which come anywhere close to even matching the current rate of inflation, earning as much interest as you can is an important step to at least slowing the damaging effect that inflation can have on your money.
Bottom line is that with the base rate increasing from 0.10% 15 months ago, to its current level of 4.25%, if you’ve not reviewed your savings accounts recently you could be missing out. Although you may have seen an increase to what you were earning, simply due to changes in the market, how much of the good news you have received varies from provider to provider. So check what rates you are currently earning and then keep an eye on our best by tables to see if you could do better.
Better still, why not sign up for our Weekly Best Buy Table email, delivering the top rates to your inbox once a week.
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