The Bank of England has published its latest quarterly inflation report and it makes worrying reading.

The Bank has lifted its inflation forecast saying it now expects consumer price inflation will peak at 3.5% – well above the previous forecast of 3%. However Bank Governor, Mervyn King, went on to say that inflation would then quickly fall back below the 2% target.

The report said CPI (Consumer Price Index) inflation rose sharply to 2.9% in December, well above the 2% target and is likely to have risen further in January.

King said the fact that inflation had come in ahead of expectations was down to the rising price of oil and the VAT increase.

Despite the predicted spike in inflation The Bank is still certain inflation is under control and will remain within target, which suggests interest rates could remain at record lows for many more months.

This is awful news for savers who are now being hit with a double blow.

Not only are interest rates payable on savings low but even that meagre return is now being attacked by inflation, at least previously inflation rates were low, savers are now being hit from both sides.

For example take the best Cash ISA rate of 3% with Santander or Stafford Railways Building Society (Source Investment Sense Best Buy Savings Accounts) with inflation at 2.9% the effective rate of return is practically zero at 0.1%, depressing stuff.

Even when interest rates do rise, it is highly possible that banks and building societies will not pass on the rise to savers as they try and restore profit margins.

The outlook is certainly bleak for savers and the need to shop around has never been greater, Investment Sense has a number of tools to help you do this, our best buy tables are available for free and updated daily and our Cash Management Service is also free, let us do the hard work for you.

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