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Savers on the back foot as spending power reduced

With UK base rates still at 0.5%, although likely to move higher in the short to medium term, savers in the UK were dealt a further blow today with news that inflation has jumped to 2.9% in December. This effectively reduces the spending power of money in the bank with savers unlikely to attract interest rates in excess of 2.9% at this point in time. So while in simple terms they may be receiving rock bottom savings rates but still seeing their pot increase, in real terms their spending power will be further reduced.

On the plus side it does look as though UK base rates are set to increase in the short to medium term with many analysts suggesting there will be a need to restrict credit in the short term because of the threat of inflation. If the government can choke the supply of credit to consumers and businesses this would reduce spending power in the UK and hopefully allow the authorities to at least reduce the threat of inflation moving higher in the short term.

However, there is a risk that by reducing credit to businesses and consumers in the short term this could stifle any potential recovery in UK economic activity and cause significant problems going forward.

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