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Inflation falls to 2.5% – what does it mean for you?

Will the much expected base rate rise be shelved?

The Office for National Statistics (ONS) revealed this morning that the March 2018 annual rate of UK CPI inflation fell to 2.5%, down from 2.7% in February.

Which? explains why this month’s inflation could be significant for the Bank of England base rate change, and how it could affect your savings.


How is March’s inflation linked to the base rate?

The base rate and rate of inflation are linked. The Bank of England controls the base rate – the official interest rate that all banks and building societies use to set levels of interest for products such as savings accounts and mortgages.

The Bank of England tends to put up the base rate whenever inflation is high. Anything above 2.0% – the target the UK government has place on the Bank of England – is considered high.

Upping the base rate is done to reduce consumer spending – people will find they get better savings rates if they put their money away, but also have to pay out more on higher interest mortages and loans.

This leaves less money left over to spend on goods and services, reducing the ‘demand-pull’ factor that can make prices go up.

As inflation has been well above the target 2.0% since January 2017 (1.8%), peaking at 3.1% in November 2017, a base rate increase has been on the cards for some time now.

Consumer squeeze subsides

The ONS also announced yesterday that, for the first time in around a year, average wages exceeded inflation in February 2018 – basic earnings rose by an average of 2.8% in the three months to February, when inflation dipped to 2.7%.

This means the squeeze on people’s wallets has started to ease, so a base rate rise would likely control any additional spending.

It’s expected the base rate rise will come in May next month, so with this being the final measure of inflation to be released before then, it’s likely to be quite significant in informing the Bank of England how much to put the rate up by.

The fact that inflation has already decreased may suggest the base rate will not need to change too dramatically.

The graph below shows how the base rate has changed over the past few years in relation to CPI inflation.

Why has inflation gone down?

Inflation is based on the price of over 700 popular goods and services in comparison to how much the same things cost in March last year.

According to the ONS, the biggest factors in March included a downward contribution from prices of clothing and footwear, which rose less than they did at the same time last year.

Similarly, prices of transport, food and non-alcoholic beverages have also been slower to increase, helping to bring the overall rate down.

Can any savings accounts beat the current rate of inflation?

Currently, there are no easy access savings accounts that can beat the current 2.5 % rate of inflation.

However, if you’re willing to commit to a regular savings account or a fixed-rate bond of five years or more, you could make some returns. This is great news as, for several months, no savings account at any term has been able to beat inflation.

See the table below for the top rates in each savings and cash Isa category.

Some current accounts also offer inflation-busting interest rates.

Nationwide’s FlexDirect account offers 5% AER for the first 12 months when you pay in at least £1,000 per month. There’s also a fee-free overdraft for the first year, and if you refer a friend you can share £200.

The TSB Plus Account offers 3% AER, along with the chance to earn £5 monthly cashback for setting up two direct debits from the account, and another £5 if you spend on the debit card 20 times a month. You have to pay in at least £500 a month.

Tesco Bank Current Account also has 3% AER. For this, you must pay in £750 a month, and you’ll also earn one Clubcard point per £1 spent on the debit card at Tesco, in addition to accruing the normal Clubcard points.

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