Renewed rise in inflation puts pressure on savings

News this week that inflation has picked up to 1.5% from 1.1% has been broadly welcomed by analysts and researchers because ultimately it means in the short term that the UK economy is showing signs of life. However, putting aside the potential problem of increased inflation, there is also concern for those with significant savings in the UK who are currently attracting minimal interest rates.

In simple terms, the higher the rate of inflation the more this eats into the value of our money and the return on your savings. For example, if inflation was 0.5% and you are earning 1% on your savings then you would have a real return of 0.5% and the relative power of your money would be increasing. However, if you are earning 1% interest on your savings and inflation was 1.5% (as it is today) then in real terms your savings and your spending power is falling by 0.5%. This is the simplest way to appreciate how inflation can impact upon the real value and real power of your savings and your income.

It is frightening when you also consider some of the elements of the UK cost of living are actually rising by more than 1.5%. There are difficult times ahead for UK savers until UK base rates move higher, which will then release UK savings rates to move higher as well.