Inflation rose at its fastest rate in 14 months in January, as the consumer prices index (CPI) recorded an annual increase of 3.5%.
The rise will be another blow to savers, who are already struggling to find savings rates that keep up with rising inflation. It also means inflation has once again breached the Bank of England Monetary Policy Committee’s 2% target by more than 1%, necessitating the Bank’s Governor, Mervyn King, to write a formal letter to the Chancellor of the Exchequer, Alistair Darling, explaining the reasons for the breach and what action the Bank proposes to take to bring inflation back down.
The retail prices index, an alternative measure of inflation which takes into account mortgage interest, rose to 3.7% in January.
The reasons behind the sudden rise in inflation are mixed. VAT has gone back up from 15% to 17.5%, oil prices have risen significantly (by 70% in a year), driving up the price of petrol. Airline fares and the cost of new vehicles have also risen.
RPI was driven up by increased housing costs, specifically mortgage interest payments, which rose this year but fell significantly a year ago, following the government’s reduction in Bank rate. Consumers who face increased mortgage costs when they come to the end of a fixed rate deal may find it hard to match their old rate. Several lenders have recently increased their standard variable rate (SVR), so it is more important than ever to keep an eye on what you are being charged and shop around for competitive rates.
Threat to savers
Should consumers worry? James Daley, Money Editor of Which? said savers need to keep a close eye on inflation. ‘If you’ve been earning less than 3% on your savings over the last few months, then the likelihood is that your money has actually been losing value in “real” terms – especially once tax has been deducted,’ he said. ‘In other words, even taking account of the interest you’ve earned, your savings wouldn’t buy you as many goods or services today as they would have done 12 months ago.’
With inflation over 3%, the only new accounts that will currently deliver you a return that beats the CPI after tax are fixed rate bonds – which don’t allow you to access your money for a set period of time. It’s possible to get rates of over 5% if you’re willing to lock up your money for five years. However, it’s important to remember that if interest rates improve between now and 2015, you won’t be able to move your money.
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