Savers to lose 3% of saving before election

Guest blog post published on on 13 November 2013.

saveoursavers 13 nov 13

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Yesterday saw the publication of the October inflation figures. Most savers probably breathed a sigh of relief that RPI had declined to 2.6% (CPI=2.2%). However there are some statistical reasons for this decline and savers are still being squeezed as most prices are rising far faster than this. Moreover this decline in inflation will probably be a temporary one.

The latest figures from the Building Society Association show that interest rates are still declining and the average instant access account (even with a bonus) now pays just 0.75%. Even average two year bond rates are now below 2%. So even if you assume inflation has declined to 2.6%, none of these accounts are going to allow you to keep up purchasing power.

But the picture is worse that this because the headline rate is created by comparing the level of prices in October 2013 with October 2012. Last October not only saw massive rises in university tuition fees to £9000pa but petrol prices were also high that month. These price rises dropped out of the annual rate calculation this month, hence the apparent drop.

Indeed if you look at the rate of rises of almost every other category of goods you’ll see that prices are still rising generally by a rate over 3% – see below. The matter is made even worse by the figures published by ONS today which shows that the latest average wage increase for UK workers is only 0.7%. Inflation is still squeezing us from all sides, despite the claims of economic recovery.

RPI Category Oct 2013 annual increase
 Personal expenditure 5.5%
 Alcohol and tobacco 4.2%
 Consumer durables 4.3%
 Food and catering 3.4%
 Housing and household expenditure 2.5%
 Travel and leisure 0.4%

Today also saw the Bank of England publish its latest Inflation Report. In the press conference launching it, the Governor, Mark Carney, made it clear that interest rates were not going to rise anytime soon. Even if unemployment drops below its 7% threshold next year, that was not going to be an automatic trigger for rates to go up – in spite of his so called forward guidance on the matter. He’ll only increase them when the slack in the economy is eliminated (a vague term, allowing a lot of wriggle room). This probably translates as meaning ‘not until after the next general election’.

In the intervening period until May 2015, prices will probably have increased a further 4-5% and the average saver lost about 3% of the purchasing power of their money[1]. Inflation tax is still being paid by the people of this country.

[1] Assuming: (1) 19 months of RPI inflation at the average rate of the last 12 months of 3% i.e. 4.5%. (2) The average saver is receiving about 1.25% interest gross i.e. 1% after tax, and 1.5% after 18 months.   (3) Net loss of purchasing power is 4.5%-1.5%=3%.