Why is inflation bad news for your savings?
Over the last few months we have heard concerns about inflation pushing ahead in the short to medium term and the potential impact this could have on the UK savings market. So why is inflation such bad news for your savings?
The truth is that we are in a relatively unique situation in the UK, and indeed around the world, where base rates are only just above zero which has led to very low savings rates, and inflation is starting to pick up. Inflation is basically the rate at which your savings, and your income, need to increase on an annual basis to maintain the same spending power. If your savings rate is higher than inflation then your spending power would increase and if you're savings rate is lower than inflation your spending power will decrease. However, it is also a little more complicated in the long run!
While ultimately you may argue that a bout of high inflation and low savings rates will not have a long-term impact on your spending power, you need to appreciate the cumulative impact this could have. If your spending power falls by 1% in year one then that would mean you have effectively 1% less money to invest for the next year and if it was to fall by 1% again then you would fall further and further behind your initial level of "spending power". It is the investment of the increase in your savings which also impacts upon your additional spending power in the future, something which is not always visible on the surface.
Share this..
Related stories
Budget Watch : UK savers
While there are many people in the UK who are suffering during the ongoing recession there is no doubt that savers in the UK have been hit particularly hard. Savings rates have fallen from 5% down to as low as 0% for some savings accounts and despite repeated promises from the UK government no help has been forthcoming as yet. However, as we approach the next budget there is speculation that we co...
Read MoreAre banks making more money from savers than ever before?
As savings rates continue to plummet in the UK while banks appear intent on maintaining relatively high mortgage rates compared to the base rate, there is a feeling that UK savers are being used to fund more expensive consumer finance. As well as borrow money from the money markets the UK banks are allowed to lend against their asset base which is in effect their savings customers and loan custome...
Read MoreIcelandic repayment package rejected by voters
The Icelandic referendum on the repayment package to the UK and the Netherlands authorities has delivered a resounding no vote which now puts the Icelandic authorities in a very difficult situation. The multibillion pound loan provided by the UK and Netherlands governments, to compensate savers who lost money in the Icelandic financial collapse, has been a bone of contention for some time. So what...
Read MoreAlistair Darling puts pressure on Icelandic authorities
Alistair Darling has entered the fray regarding the Icelandic banking collapse compensation scheme which was ratified by the Icelandic parliament but has been held up by howls of protest from Icelandic taxpayers. Indeed the president of Iceland has been forced to attend a number of meetings with activists who are dismayed at the fact the compensation scheme is costing each and every member of the...
Read MoreMobile banking to create wave of secret savers
The rise of new ways to manage finances is set to fuel a huge rise in the number of couples who keep their savings levels a secret from their partners, a new report predicts. NS&I's Century of Saving report predicts that by 2050 the proportion of couples who are less than honest with their other half about their finances will increase from its current level of eight per cent to 25 per cent. The re...
Read More