Another month, another jump in inflation. And although it’s not as big a jump as we saw last time, it is more than predicted. It was thought that inflation would increase from 5.1% in November to 5.2% in December, but according to the latest figures from the Office for National Statistics, the Consumer Prices Index for the 12 months to December 2021 was 5.4% which is the highest that CPI has been since its inception in 1997. But we do know that the last time inflation was as high as this was March 1992 when inflation was heading down from a peak of 8.4%. You might be interested to know that the base rate was at 10.5% in March 1992.
What’s pushed inflation up this time? Well, it’s the usual suspects I’m afraid; food, energy, clothing and secondhand cars. But also, restaurant bills, furniture and hotel prices as we headed to Christmas.
The increase in the cost of food over the last 12 months has been the highest we’ve seen for over four years and energy costs are set to rise even further in April when Ofgem raises the price cap again. This could see home energy costs rise by over 50% more than we’ve already experienced, to as much as £2,000 a year, according to Emma Pinchbeck, the chief executive of the trade body Energy UK.
All in all, this means that experts are expecting inflation to reach nearer 7% in the spring. At this level as our inflation calculator below shows, your money will half in real terms in around just 10 years – a frightening statistic, especially if you have money sitting with your high street bank earning almost no interest at all!
Add in the freeze on our personal tax allowances and we’re in for a pretty tough time.
So, what can we do?
As we reported back in September last year, the city regulator, The Financial Conduct Authority (FCA) has called for more consumers to invest rather than hoard cash, as over the long term, the return is likely to be far better than the interest you can earn on cash, albeit with expected market volatility – but not a bad thing to think about, especially as the bite of inflation becomes more acute.
But for those who need to keep money in cash, as we are always saying, it’s vital to shop around to make your money work as hard as possibly and at least mitigate some of the effects of inflation.
Leaving money with the high street could cost you over £10,000!
If you had £50,000 sitting in account with your high street bank paying as little as 0.01%, after 5 years, with inflation at its current level of 5.4%, although the actual value of your deposit will have grown to £50,025, the real value after the effect of inflation is just £38,458.
If you were able to tie some of your cash up earning at least the current 1-year best buy rate of 1.36%, the actual value, including accrued interest (assuming any subsequent bonds are paying the same rate) would rise to £53,494 and although the real value after the effect of inflation would still be lower that your original deposit, it would be £2,667 more than it would be if sat with the bank at 0.01%, at £41,125.
So, although you might not want to tie up your cash for as long as five years, it does pay not to just leave cash languishing in an easy access account if you don’t need immediate access to it. And of course, the other option could be to considering investing the money instead.
See how your savings are faring against inflation with our Inflation Calculator below.
Check out our best buy tables to keep an eye of the accounts you could consider.
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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