FSA reconsiders inflation based returns

The FSA has today stepped into the mix in relation to financial institutions offering savings returns based upon the level of the RPI (retail price index). A number of companies have been using the current RPI, around 4.8%, to project forward what look like very lucrative returns. One company, the National Savings & Investments Company, was forced to revise down one projection on a particular product from 5.82% a year to 3.96% per annum.

The FSA stepped in and demanded that that rather than using the current RPI the average over the last five years would be a more realistic indication. This is just one example of how inflation can and does affect levels of return and the cost-of-living in the short, medium and longer term. The higher the rate of inflation, measured by the RPI or CPI, the lower the real return on investments and higher the cost of living. Those who believe that inflation "is not an issue" at this moment in time may well need to think again because potentially a high rate of inflation could derail any potential UK economic upturn.

It will be interesting to see how RPI, or CPI, related products are marketed in future and the returns they actually provide against their forecast returns.