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What savers need to know about rising inflation

Inflation is having a profound effect on your cash savings
What savers need to know about rising inflation
Reading time: 5 mins


Inflation may be the kind of topic that makes you immediately glaze over. But in fact, it is one that you should sit up and pay close attention to, since it’s actually having a rather profound effect on your cash savings. By which we mean it’s taking a little bite out of them every day.

You might not realise, but as you read this, your cash savings are slowly dwindling. Before you rush off and check your balance for irregularities, don’t worry. We don’t mean dwindling in the sense that they’re getting physically smaller. Your balance should look like it did last time you checked. The problem is that inflation is nipping away at your stash, affecting its ‘purchase power’. As inflation increases, your purchase power decreases, little by little, meaning your money will stretch less far, when you finally come to spend it.

Inflation is measured year on year, so at its current rate of 1.2% (December 2016)1, things are about 1.2% more expensive than they were at the same time last year. In other words, a £15,000 car in 2015 might now cost you £15,180, or a round of drinks that cost you just under £10 last year, might cost just over £10 now, resulting in a lot of annoying change if you pay with a twenty.

Just to confuse things, there are actually two official figures for inflation. The UK inflation headline rate comes from the Consumer Price Index, (or CPI), currently at 1.2%. But there’s also a Retail Price Index1 (RPI), at 2.2%. Both are worked out by totting up the prices of a basket of consumer goods and services that Brits typically spend their money on and taking an average. This imaginary basket is rather extensive and includes some strange things, including a Ford Focus, consumer debt and a Big Mac. The only real difference between the CPI and RPI is that the RPI calculation includes mortgage interest payment and other housing costs and they’re calculated in a slightly different way. For that reason, the RPI figure tends to sit around 1% higher than the CPI.

In any case, most people take the CPI figure as the official rate. It spent most of 2016 below 0.5% until September1, when it made a surprise jump to 1%. Ever since, economists and other people with clever sounding job titles have been busily predicting it will continue to rise sharply next year. Some predictions suggest it could reach 4% by the end of 20172, while more sensible sources like the Bank of England3  predict around 2.7%. What experts do agree on is that the trend is likely to be firmly upwards.

So, what has all of this got to do with your savings? Well, assuming you are planning to spend them at some point in the future, a lot!

If the return you’re getting on your cash savings or cash ISA is higher than the rate of inflation – i.e. 1.2% - you can relax. Well, sort of. You might be beating inflation but it’s still diminishing your true return, so if you’re getting, say, 1.3% per annum, your actual return is closer to 0.1% when you take inflation into account.

For those on a rate equal to, or below inflation (1.2%), your returns are falling way behind. That’ll be most of us, given that an FCA report4 in December 2015 found that average cash ISA rates at 0.75%p.a. and easy-access savings accounts at 0.25%p.a. And those were just the averages, the worst rates found were 0.1% (ISAs) and 0.01% (cash savings). So, even though your savings balance itself isn’t shrinking, the possibilities for how you can spend the cash in the future, are.

So, what can you do about it?

You could go chasing the enticing introductory, or fixed-term rates every 12 months, but it’s a heck of a lot of effort. Many of the leading rates now are from regional building societies, like Penrith, offering 3% p.a. (November 2016)5 but involve catches, like you need to live in a certain area, so getting the best rate can literally be a postcode lottery. What’s more, after the introductory period, your rate will typically drop off the proverbial cliff anyway, putting you back at square one.

Alternatively, you could concede that cash savings accounts are not the best way to grow your money and look at other ways to get a consistently inflation-beating return.

Perhaps investing could be the answer? Yes, there’s more risk, but there’s also a growing degree of choice and accessibility for the novice investor. Robo-investing is a new affordable, easy to use investment services where experts build you an investment portfolio and manage it for you every day in return for a flat annual fee of typically no more than 0.98%.  

So, if checking your savings growth leaves you feeling let down by your bank, it could be high time to see what investing could do for you. Find out how much could you be worth with Wealthify's investment calculator


Please remember that the value of your investments can go down as well as up and you can get back less than invested.


1 ONS Inflation and Price Indices: https://www.ons.gov.uk/economy/inflationandpriceindices

2 National Institute for Economic and Social Research (NIESR) http://www.bbc.co.uk/news/business-37838087

3 BBC News 3 Nov 2016: http://www.bbc.co.uk/news/business-37860880

4 Evidence: FCA Cash Savings Sunlight Remedy Report: http://www.fca.org.uk/news/cash-savings-sunlight-remedy

5 Go Compare Savings & ISAs search 13/12/16: https://money.gocompare.com/savings?gcclickid=cdd79071-efa4-46a5-88ce-d763807c2720#/?page=2&_isEasyAccess=true&_isFixedBonds=true&_isPeerToPeer=true&_isCashIsas=true

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