Inflation: Good news for savers as inflation hits 2% target?

Posted on January 15th, 2014 | Categories - News

Inflation DecFigures released yesterday show that inflation finally hit the Government’s 2% target of in December, but is this good or bad news for savers?

According to data released by the Office for National Statistics (ONS), inflation, as measured by the Consumer Prices Index (CPI), fell to 2% in December, down from 2.1% in November.

It is the first time the Bank of England, the organisation tasked with keeping inflation at the 2% target, has been able to do so since November 2009.

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The slight fall was attributed to slower increases in the cost of food, particularly fruit and meat prices. Discounting on the high street in the weeks leading up to Christmas also helped reduce the rate of inflation, which would have been even greater had it not been for increases in the cost of gas and electricity prices.

However, the Retail Prices Index (RPI) actually rose slightly to 2.7%, from 2.6% in the previous month.

Good news for savers?

The slowdown in the rate of inflation is probably a mixed blessing for savers, who have been hit hard by a combination of low interest rates and relatively high price rises.

On the one hand, the news will ease pressure on the Bank of England to push up interest rates, which is obviously bad news for savers. However, the fall does now mean more savings accounts offer a real return.

Until recently savers were hard pressed to find a savings account to beat inflation, now though, according to the Telegraph, there are 77 accounts which offer an interest rate which will allow savers to beat inflation after tax has been deducted.

Savers should be cautious though, 46 of the accounts are Cash ISAs (Individual Savings Accounts) which only allow a maximum annual contribution of £5,760, whilst many of the other accounts require savings to be tied up for at least three years.

There is of course no guarantee that inflation will remain at 2%. If it were to increase, savers who have tied up their capital could be left with a real terms loss, a problem which would be further compounded if interest rates were then to rise.

Sylvia Waycot, Editor of Moneyfacts, said: “Today’s news of a fall in CPI will be welcomed but it won’t change the average no-notice savings account from paying a miserly 0.64%, or the fact that savers who don’t want to lock their money away for any length of time really have no chance of achieving the 2.50% needed just to counter the effects of inflation and pay the taxman’s share.”

Waycot continued: “Savers might think that the withdrawal of the Government’s Funding for Lending Scheme will herald the return of competitive savings rates, however, this is unlikely to materialise for some months and the ISA season will be a good indicator of how things may develop for the rest of the year.” (Source: Telegraph)

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