With inflation proving stickier than ever, it was inevitable that the Bank of England would need to increase the base rate again. But its 13th rise in a row was higher than expected – up 0.50% to take the base rate to 5% - its highest level in 15 years.
On Wednesday (21/6/23) the Office for National Statistics made the shock announcement that Consumer Prices Index (CPI) inflation has remained the same in the 12 months to May 2023 at 8.7%, although it was widely expected to fall. This was the fourth month in a row that inflation figures have been higher than expected and was a clear signal that the Bank of England would need to raise rates again, unlike the US Federal Reserve who paused rate increases in their latest meeting last week.
Analysts have said that there was no good news in the inflation data. Core inflation, which excludes volatile items such as food and energy prices actually increased to 7.1% from 6.8% - its highest level since 1992.
Chief UK economist at Capital Economics, Paul Dales, said the BoE would have to “fight tougher” to bring down inflation because “the acceleration in core inflation leaves the UK looking increasingly like the global outlier and the stagflation nation”.
When you dive into the details though, your personal rate of inflation may actually have fallen a little, depending on your choices. The most significant price rises which helped to maintain the overall rate of inflation was the rising cost of air fares, secondhand cars, package holidays and live music events. If you don’t fly or go to festivals, you may be better off than others.
On the other hand, although still eye wateringly high at 18.3%, food inflation was actually a little lower than last month’s figure of over 19% - and petrol and diesel prices have also continued to fall.
Of course, although some items might be getting cheaper, in the main the reason we may see inflation falling going forward, is because prices will start to rise more slowly, as opposed to actually falling in price. And this means that the spending value of your money will fall if you are not earning more than inflation.
Did you know that it’s 25 years since the £2 coin was first introduced – and over that time inflation has wiped out nearly half of its spending power (assuming it has not earned any interest), as the chart from the Sunday Times illustrates.
So are there any winners?
Whilst this is a stark reminder of the damage that inflation can inflict, especially when it is high, there are things you can do to try and at least slow down the effects of inflation
This latest Bank of England base rate news means that there will be more pain for borrowers as inevitably mortgage and other loan rates will increase but it should be good news for savers.
Although there was no fall in the headline rate of inflation, with the base rate rising to 5% and many savings rates actually exceeding this at the moment, are savers beginning to win again? How can people take advantage of what is happening at the moment. How can you make sure you are one of the winners?
Well, if you switch your cash into the best paying accounts, earning more interest will help to mitigate the damaging effect of inflation.
The top easy access account is now paying 4.15% - although this account from the Principality Building Society only allows two penalty free withdrawals a year (which includes closing the account). Unless the interest rate is cut, once you have made two withdrawals, you will not be able to access your money until the following calendar year.
However, if this account suits you, on a deposit of £10,000 you could earn £415 a year. If inflation were to remain at 8.7%, after a year the actual value and therefore the spending power of your cash would have fallen to £9,581. If you leave your cash languishing is a poor paying account such as the Virgin Money Everyday Saver which is paying just 0.25%, you would earn just £25 a year and the actual value after inflation would be just £9,223
Better still, the top 1-year fixed rate bond with Smart Save, is paying 5.71% - so would provide gross interest of £571 over the 12 month term and its real value would be £9,725.
What this shows is that while there are still no savings accounts that can outpace inflation at the moment, the winners are those who shop around for the best savings accounts that suit their needs.
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