Despite wide coverage in the media about the credit crunch and what it can mean for consumers, people are still suffering from a lack of knowledge about the implications that conditions in the economy can have on returns from savings accounts and other investments.

Almost 10 per cent of Britons admitted that they do not even know what inflation is, let alone what affect it has on their savings, while almost a third said that they know what inflation is but are unaware of how it can directly affect their savings. More than a quarter also said they do not know what affect tax can have on their savings.

“It is concerning that many people don’t understand what inflation is, or how it might affect decisions about saving or spending money.” said John Prout, sales director at NS&I;. “Inflation means that prices increase over time, so £100 today will buy you a little bit less in a year’s time. It can be caused by increases in salaries, increased demand for items or a decrease in supply which all push prices up.”

“People are more likely to think about how inflation affects the price of their shopping basket, but not how it affects the value of their savings. The RPI is one of the measures of inflation and with it averaging 3.98% last year if we don’t put our savings in a tax free account matching or a non tax free account beating this rate then our money will be worth less in the future.”

It would seem that the older generation is generally wiser when it comes to understanding inflation and tax, the number of people who admit to not knowing how they are affected by these factors dwindles the older people get.

The younger generations have grown up in a time when the economy has been booming, with low levels of inflation, Mr Prout explains, while the older generations remember a time when saving came before spending and are more aware of the impact that tax and inflation can have.

© Fair Investment Company Ltd