Inflation as measured by the Consumer Prices Index (CPI) saw another big jump in July, from 9.4% in the 12 months to June 2022, to 10.1% in the 12 months to July this year – even higher than expected.
Once again, the pain is likely to be felt by everyone as the biggest contributors to this jump continue to be a rising price in food – in particular staples such as bread, milk cheese and eggs, but also fast food, takeaways and pub meals. And of course the ongoing rise in the price of fuel, both at the petrol pump and at home. While petrol prices seem to have fallen in August, we are all being reminded that there is likely to be another significant jump to the price of gas and electricity. Household energy bills increased by 54% in April 2022, a record increase, and are likely to rise substantially again in October when there will be a review of the energy price cap.
Of course, this ongoing hike to the cost of living appears to have had a silver lining, as the Bank of England base rate has increased from 0.1% in December last year, to its current level of 1.75% - the highest it’s been since 2008.
As a result, those regulars of Savings Champion will be more than aware that savings rates have also risen sharply this year and some of the best rates available are the highest they have been in almost a decade. Much higher than they have been, but unfortunately still not quite as high as they were when we set up Savings Champion in November 2011, when base rate was just 0.50%. At that time the best easy access account was paying 3.15% while the best 5-year fixed rate bond was paying around 4.70% - meanwhile CPI inflation was at 4.8%. So higher than easy access but close to the best 5-year rate. And as inflation was falling at that stage, those who did lock in to 4.70% would have actually been earning more than CPI for the full term, meaning that even cash was able to increase in real terms – a situation that is not always the case, certainly not at the moment.
This week, I decided to take a look back over the last 10 years and track CPI compared to the best rates available at the time, to indicate how often your cash savings have earned more than inflation.
The black line in the chart below shows how CPI has changed over the last 10 years and it’s startling to see just how fast it has risen in the last year. Unfortunately, the chart also indicates that although best buy saving rates have also increased over that time, it’s an understatement to say that they are not keeping up.
Source: SavingsChampion
There have been some periods in time where your savings have earned more than inflation, but it’s not the norm. And who knows just how big the gap will get over the coming months and years. Will it widen further and when will it start to narrow?
Why is this important?
Inflation is a silent killer for savers, as although your deposit is secure and won’t fluctuate in value, if the interest you earn is less than the rising cost of living, your spending power is becoming less and less, meaning that you may need to dip into your savings in order to continue to maintain your standard of living.
For example, with inflation at 10.1%, if you hold £10,000 in an account paying 0.10%, after just 12 months although the balance may have increased to £10,010, the real value after the effect of inflation will be £9,092. This means the loss caused by the erosion of inflation is £918. After two years you would have lost £1,754 in real terms, even though your balance may have appeared to have increased to £10,020.
If you switch to an account paying a more competitive rate, whilst this won’t eradicate the problem, it can reduce it. The best 1-year bond is currently paying 3.05%, so if you held £10,000 in this account, at the end of the term, the balance before inflation would be £10,305 and the real value after inflation would be £9,360.
This clearly illustrates why keeping your cash in the best accounts is so important.
But, with a staggering £304bn sitting in savings accounts paying 0.10% or less (according to data from consultancy firm CACI) and a further £264bn in non interest-bearing current accounts* it seems that many people haven’t got the memo! Let’s hope that if we continue to bang the drum, more savers will get the message that they must switch to do all they can to protect themselves.
Of course, if you’re worried about rising inflation and think you might be holding too much in cash, there may be other options. Perhaps you'd like to explore these, 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.
*Bank of England June 2022
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