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Is Inflation Eroding Your Savings?

With UK inflation continuing to rise and interest rates set at a historic low, can you afford to let your savings erode?

Topic: Economy

Earlier today it was announced that UK inflation had risen again, with the Consumer Prices Index going up by 1.8% in the year to January 2017, compared to a rise of 1.6% in the year to December 2016.

So, what does today’s inflation rise mean for your finances? In basic terms, the cost of everyday goods and services in the UK is going up. This includes things such as a loaf of bread, energy bills, clothing and transport costs.

The Consumer Prices Index matters because when it goes up, our living costs follow suit. The recent increases we’ve seen are predicted to continue, with one think tank, the National Institute of Economic and Social Research, forecasting consumer price inflation will rise to average 3.3% in 2017 (1) – a significant increase from today’s figure.

How much is your money earning?

If you have any savings in a bank account, you will have noticed that you’ve not been earning much interest on your money since the banking crisis of 2008.

The Bank of England sets the base interest rate and banks use this as a guide for setting their own rates for savings accounts.

The current Bank of England rate is 0.25% and this has remained unchanged since August 2016. Trading Economics has predicted that by 2020, the UK interest rate will likely be 1.25% (2) – which is still below today’s rate of inflation.

With interest rates at an all-time low, this spells bad news if you’re a saver. If the price of everyday goods and services is rising higher than interest rates on savings, having your money sitting idle in a cash account could mean your savings are eroding rather than growing. With inflation predicted to rise higher than interest rates for the foreseeable future, it’s time to start looking at your options.

Drilling down into the figures
• James’ online savings account

James Donaldson is 33 years old and works as a chartered surveyor in Sunderland, Tyne and Wear.

He has £11,000 in an online savings account with his bank. His account earns him 1% interest per annum which is £110 per year or just over £9 per month.

His monthly expenditure on things included in the Consumer Prices Index is £2,000. These rise by an average of 3.3% during the course of the year. This results in James paying £792 more than last year on these everyday goods and services.

So, even taking into account the additional earnings of £110 from his annual savings, he is still paying £682 more each year for goods and services. In other words, the interest from his savings is not keeping up with inflation, so the value of his money is effectively being eroded on a daily basis.

James is concerned that his savings are starting to dwindle and is thinking about investing his money for the first time.

Is it time to look at other options?

If you’re in a similar position and looking for a way to potentially grow your money over the long-term, investing may be the better option for you, but remember the value of your investments can go up or down.

If you’d like more information about investing, please take a look at our saving vs investing infographic.

(1) National Institute of Economic and Social Research
(2) Trading Economics

*Names and personal details in examples are for illustrative purposes only and are not based on any real individual.

The information in this article is for private circulation and is believed to be correct but cannot be guaranteed.

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