Inflation soars to 3.7% - Economy - News - Moneyfacts

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Inflation soars to 3.7%

Inflation soars to 3.7%

Category: Economy

Updated: 18/01/2011
First Published: 18/01/2011

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Savers face a real battle to find value for money, after figures showed that inflation increased to 3.7% in December.

The Consumer Prices Index rose by 0.4% last month, meaning the measure is way above the Government's long term target of 2%.

The Office for National Statistics said the rise in inflation has been caused by the rising costs of air travel, fuel, utility bills and food. It is possible that the rate of inflation could rise further in the coming months, up to 4% or beyond.

The Bank of England is likely to face further calls to increase the base rate to help combat the effects of inflation, although Ernst & Young yesterday urged the Bank to hold its nerve.

" It's vital that the Monetary Policy Committee stands firm. These are temporary pressures, domestic cost inflation remains low and CPI inflation will come back to heel in 2012 once the VAT increase falls out of the figures next January," said Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club.

Today's rise in inflation is the latest blow to savers, as the value of their funds has been eroded once more.

To beat inflation, a basic rate tax payer at 20% needs to find a savings account paying 4.63% pa. Basic rate taxpayers can choose from just 22 accounts which negate the effects of tax and inflation, including 19 ISA accounts.

They must be prepared to tie up their funds for a prolonged period to access such rates, however, a higher rate tax payer at 40% needs to find an account paying at least 6.17%, of which there are only 19.

"Savers who have been struggling for many months to achieve a competitive return on their funds will be severely disappointed by yet another rise in inflation," said Louise Holmes, spokesperson for Moneyfacts.co.uk.

"Over recent weeks some providers have raised easy access rates, but they are still too low to battle the effects of inflation."

"Typically, cash ISAs and longer term fixed rate bonds tend to offer the best rates for savers trying to beat inflation. However, with interest rates predicted to rise by the end of the year, many investors are reluctant to lock funds away for a long period of time."

The average savings interest rate payable to a basic rate tax payer, currently 0.83%, is in effect being eroded by 3.06% per year.

To highlight just how average savings rates have struggled to keep up with inflation; savers who invested £10,000 in January 2008 would now have the spending power of just £9,516.

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