🔔 Surprise increase in inflation as businesses re-open

Author: Anna Bowes
26th August 2020

There was a surprise increase to the rate of the Consumer Prices Index (CPI) in July 2020 as prices started to rise more quickly, following the relaxation of the lockdown rules.

According to the Office for National Statistics (ONS), CPI inflation jumped from 0.6% in June to 1% in the year to July 2020 – however, this is still well below the official target of 2% and somewhat higher than industry experts were predicting.

One of the key reasons for this increase, is due to a lack of the usual summer sales on things like shoes and clothes. It appears that these discounts - in order to get rid of old season stock - had already taken effect earlier in the year, to attract online shoppers.

Other businesses that have since opened up for the first time, such as hairdressers and dentists, have upped prices due to the increased costs associated with opening up with social distancing measures including costs for PPE and extra cleaning costs.

Interestingly it’s men who are being hit the hardest at the barbers as the ONS stats suggest a 6.1% increase in the cost of men’s haircuts, while women’s have increased by 4.5%.

Another key reason for CPI to have risen so much compared to June, was due to an increase in fuel prices at the pumps. Jonathan Athow at the ONS said “Inflation has risen, in part, due to the largest monthly pump price increase in nearly a decade.”

An unfortunate coincidence with this jump in inflation is that July is the month used to calculate the increase in rail fares and although fewer of us are using the train at the moment,  this will be a blow for those who do when the price rises take effect at the beginning of next year. The increase is calculated using the higher figure of the Retail Prices Index (RPI), so commuters will see rail fares increasing by 1.6% from January.

Although some experts believe we’ll continue to see a rise in inflation into the New Year, others suggest that it is not expected to continue – and there is still even a possibility of negative inflation, or deflation, as explained in an article brought to you by our sister company, The Private Office.  As ever, we’ll have to see how things unfold.

A rise in inflation, certainly over the Government’s 2% target, generally puts more pressure on the Bank of England to raise interest rates, However, we won’t be holding our breath for an increase to happen anytime soon and even more so when it come to a sustained rise in savings rates. Sadly, as we know, whilst savings providers are quick to apply cuts following a base rate reduction, the opposite is not always true.

The jump in CPI means that once more there are fewer savings accounts available that beat or at least match inflation – and many accounts continue to pay virtually no interest at all, which means that the real value of this cash will be even more adversely affected.

So, it’s still vital to shop around as even with the base rate at a record low level - getting the best rate can make all the difference.

The high street banks are all paying 0.01% AER on their easy access accounts. On a balance of £50,000 that means earning just £5 a year.

More importantly, with inflation at 1% the real value of your money after 12 months would have fallen to just £49,510. After five years, your £50,000 would be worth just £47,597 in real terms.

However, if you were to choose a more competitive rate of interest, there’s currently no need to accept your money falling in real terms. If you were to deposit your £50,000 into NS&I Income Bonds, you would earn £575 in interest over 12 months. But even with inflation at 1% this means your capital plus the interest would still be worth more in real terms. After one year the real value would be £50,074 – over five years £50,372 – £2,775 more.

Better still, with fixed rate bonds offering increasingly better deals (see our recent article on fixed rates increasing) inflation will have even less of an impact. Currently the best rate available is with Charter Savings Bank which is paying  1.22% AER - over 12 months you could earn £610 gross interest – and in real terms your cash would have more than kept pace with inflation. In real terms your £50,000 would have increased to £50,109 instead of dropping to £49,510 if you leave it to fester with a  high street bank.

We have no real way to manage inflation ourselves – but we can make sure our cash is earning as much as possible – don’t settle for what your high street bank is prepared to offer. Take a look at our Best Buy Tables to see if you could be earning more.