Inflation rise hits savers3.4% CPI and 4.4% RPI leave interest rates behind

20 April 2010

Savers have been caught between a rock and a hard place as inflation continues to rise, while the Bank of England base rate remains at an all-time low. 

Petrol prices are on the up again

Petrol prices are rising again, the AA said

The latest inflation figures show the Consumer Prices Index (CPI) rose to 3.4% in March 2010, up from 3.0% the previous month, while the Retail Prices Index (RPI) went up to 4.4% from 3.7% over the same period. 

Inflation drivers 

The Office for National Statistics identified transport costs as one of the main drivers of inflation in March. Petrol and oil prices have risen more than 25% over the past 12 months. Vegetable prices have also risen, following poor weather. Mortgage interest payments have started to creep up again too, rising by 0.7% during the year to March 2010, after falling steeply before this.

Savings outstripped 

Many savers will fail to match inflation over the year if current rates persist. To get 3.4%, standard rate (20%) taxpayers need to earn 4.25% interest. This is only possible by locking money away in fixed rate savings accounts. Those who pay 40% tax have a target of 5.7%. Anyone paying the new top rate of 50% tax needs to earn 6.8%. 

Tax-free accounts  

Taxpayers in all bands can protect themselves from the worst of inflation with tax-free savings accounts. As a timely starting point, they should be sure to use their 2010-2011 Isa allowance and look for the current top rate cash Isas. Other tax-free savings accounts are also worth investigating, including NS&I savings certificates and cash Child Trust Fund (CTF) accounts

Investment options

In the current climate, savers at risk from inflation may want to consider investing in equities or products that offer a chance of stock market growth. This is riskier than saving, of course, but if inflation continues to climb the certainly of falling value may make it a more attractive option.  

James Daley, Money Editor at Which?, said: 'The combination of low interest rates and rising inflation has been hitting savers hard over the past few months. It's more important than ever to make sure you're getting the best possible rate of interest on your savings account. If you're willing to tie your money up for at least five years, you can still get interest of more than 5% a year. And make sure you're using your full Isa allowance, so that your savings aren't getting eaten away by tax.'

pound coins

Which? Money when you need it

You can follow @WhichMoney on Twitter to keep up-to-date with our Best Rates and Recommended Provider product and service reviews.

Sign up for the latest money news, best rates and recommended providers in your newsletter every Friday.

Or for money-saving tips, and news of how what's going on in the world of finance affects you, join Melanie Dowding and James Daley for the Which? Money weekly money podcast

For daily consumer news, subscribe to the Which? news RSS feed here. And to find out how we work for you on money issues, visit our personal finance campaigns pages.