The cost-of-living crisis continues, but overall price rises in the UK slowed a little for the second month in a row in the 12 months to December 2022, according to the latest statistics from the Office for National Statistics (ONS).
The Consumer Prices Index (CPI), which is a key measure of how much prices are increasing, fell to 10.5% in the year to December, slightly lower than the 10.7% figure in November. But of course, this means that the pace at which prices are rising fell, as opposed to the cost of items actually falling in price.
In response to the latest inflation announcement, Chancellor Jeremy Hunt, said: "High inflation is a nightmare for family budgets, destroys business investment and leads to strike action, so however tough, we need to stick to our plan to bring it down.
"While any fall in inflation is welcome, we have a plan to go further and halve inflation this year, reduce debt, and grow the economy - but it is vital that we take the difficult decisions needed and see the plan through.”
What this could mean is further interest rate rises – more than the market is currently anticipating, which is for the base rate to peak at 4.25% in May.
The Bank’s chief economist, Huw Pill recently warned that inflation could be more persistent in the UK than in other countries, supporting the idea that rates could have further to go. Bad news for borrowers, but good news for savers.
What has eased the rising cost of living… and what has not?
Once again, the reduced cost of petrol and diesel prices in December compared to November this year was a main reason for the fall in the rising cost of living – along with cheaper clothing and footwear. But while we don’t all have to buy motor fuels and may not have a need to buy new clothes and shoes at the moment, food prices have continued to rise faster than ever, up 16.9% in the 12 months to December – something the majority of us can’t avoid unless we are living Tom and Barbara’s ‘Good Life’.
But you too can make better choices to keep your personal food inflation figure down. For example, while, ‘milk cheese and eggs’ as a group has seen one of the largest rises (30.2% increase in the 12 months to December) milk has gone up far more than yogurt (whole milk 38.5%, low fat milk 46% v yogurt up 17.6%) – so perhaps switch milk for yoghurt on your cereal.
The price of potatoes has increased by 17.5% over 12 months, compared to a more palatable 9.7% for rice.
And the good news for the healthier among us is that fresh fruit prices have risen by just 6.4% over 12 months, down from 8.2% in the 12 months to November 2022.
Of course, it’s not just about how much items have increased by in percentage terms, the bottom line is how much they actually cost. A 25% increase to a lower cost item will have less of an impact to your overall spend, than a 25% increase on a more expensive item.
Another activity to avoid if you want to keep your personal rate of inflation lower is to fly. The annual rate of inflation of passenger air travel was 44.1% in the 12 months to December 2022, the largest recorded increase since 1989 when the ONS started recording this item – up 19.8% in just one month, between November and December 2022. So if you don’t need to fly, it’ll be better for your pocket and the environment.
What does inflation do to your savings?
As we have reported, the plus side to the inflation issue is that the Bank of England has had to raise the base rate repeatedly. The problem is that there are still no savings accounts that are paying interest that is higher than inflation.
That said, savings rates are at the highest level for a decade and now you can actually earn a meaningful amount of interest, especially if you choose the best rates available. Although this doesn’t mean that the spending power of your cash can keep up with the rising cost of living, it can help to mitigate the problem.
There is still a staggering £268 billion in current accounts, earning no interest at all and of the £992 billion that is sitting in easy access accounts, much of that is likely to be with a high street bank, which although paying more interest that they were, are still far below the best rates available.
Why is this important if you can’t beat inflation?
Well, as our calculator below shows, if you hold £10,000 in a current account earning no interest, the ‘real value’ of your money after the erosion of inflation will reduce to £9,050 after 12 months, assuming inflation were to remain at its current level of 10.5%.
If instead you put that £10,000 into a top easy access account earning 2.90% the total balance after a year, including accrued interest will be £10,290. However more importantly although the ‘real value’ would still be lower at £9,312, it’s worth £262 more in real terms. Why should your bank benefit rather than you.
So the bottom line is that if you haven’t reviewed your savings for a while, now is a good time to do so, as you could well put more pounds in your pocket and help mitigate the damaging effects of inflation!
Of course, if you’re worried about 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.
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