Inflation still above target, spelling more bad news for savers

Written by Editorial Team

17 August 2010 / by Lois Avery

Inflation has fallen slightly this month but is still much higher than the Government’s target, meaning savers will continue to struggle.

The Bank of England announced today that the Consumer Price Index (CPI), the UK’s inflation measure, has fallen by 0.1 per cent to 3.1 per cent but it is still much higher than the 2 per cent target.

The news forced the Bank’s governor, Mervyn King, to send another letter of explanation to Chancellor George Osborne, explaining why inflation is still peaking over one per cent higher than it should be.

The persistently high CPI figure has been put down to a rise in food prices in July, with meat, veg and fruit costs increasing. In April, it peaked at 3.7 per cent.

Rising wheat prices could add to the pressure on food inflation in the months ahead, and the VAT rise in January is also expected to have an effect.

On top of above-average inflation, the Bank of England has decided to maintain the all-time low base interest rate of 0.5 per cent with experts suggesting it could remain low for the coming years while the UK slowly recovers from the effects of recession.

The combination of low rates and above-target inflation spells more bad news for savers, who have been struggling to find accounts paying enough interest to make a decent return.

To stop their savings pot effectively eroding, a basic rate tax payer needs to find an account paying 3.88 per cent, while a higher rate taxpayer needs to find an account offering 5.17 per cent, according to Moneyfacts.

Darren Cook, spokesperson for Moneyfacts.co.uk, said: “Savers may have had a short respite from a marginal fall in inflation, but savings rates have hit a plateau and maybe there for a while.

“It is difficult for savers to try and beat inflation, but at best, they should try and stay within an arm’s length and try and weather the storm of low rates and high inflation.”

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