Friday, May 21, 2010

Inflation hits 5.3 pc - no savings account pays any return !

A surprise jump in inflation to 5.3 per cent means that not a single savings account on the market offers an interest rate higher than the cost of living.

Britain's millions of savers will find the value of their investments wiped out by the increase in the cost of living, financial experts said.

Not one of the 1,660 savings accounts on the market being offered by banks or building societies, including the most generous Individual Savings Accounts, offers a real rate of return of more than 5.3 per cent. This is the first time that no account has been able to match the rising cost of living, according to the personal finance website Moneynet.

The Office for National Statistics said that inflation, as measured by the Retail Prices Index jumped from 4.4 per cent in March to 5.3 per cent in April. The RPI is widely accepted as the truest measure of the cost of living because it includes housing costs.

This is the highest level it has been since 1991.

The jump, which took economists by surprise, came after consumers suffered from record prices at the petrol pumps, higher mobile phone and telephone bills, an increase in food and drink prices as well as rising mortgage rates and the cost of clothing.

Many of the increases came from tax rises announced in Alistair Darling's last budget, which pushed up the price of alcohol and vehicle duty. The restoration of VAT to 17.5 per cent has also had the effect of increasing prices on nearly all items on the high street.

The rise in the cost of living dwarfs the average increase in wages, which on average are just 1.9 per cent higher than a year ago, meaning most workers are suffering from a significant fall in their standard of living.

Though the governor of the Bank of England, Mervyn King, said that inflation would "wane over time" he admitted the timing of any fall was "highly uncertain".

Financial experts said savers were the real victim of stubbornly high inflation, which has increased for the eight consecutive months.

Ros Altman, a former adviser to the government and an experts on savings and pensions, said: "The Government keeps on saying high inflation is temporary. But anyone with a fixed saving is losing out. And savers were one of the biggest losers already from the recession."

Inflation has the effect of damaging savings, because even though the investment can increase in value, it cannot keep pace with the increase in prices on the high street.

Ms Altman said: "The effect of inflation is insidious. It creeps up on you. You think you are getting more money every year, through wage increases or interest earned on your savings, but when you go out and try to spend you money you realise you can't afford what you used to be able to.

"You end up poorer. It is as simple as that."

Any interest earned from a saving account is taxed, so a bank account now needs to offer interest of at least 6.63 per cent for basic rate taxpayers and 8.83 per cent for higher rate taxpayers to make any real return.

There is not a single saving account that offers more than 8 per cent and just one, from HSBC (LSE: HSBA.L - news) , that offers more than 6.63 per cent, but that requires people to open an account that costs a fee of £15 a month and customers have to make regular monthly deposits.

Though no bank or building society can offer an account that beats inflation there is just one product that can. It is a bond sold by the Government-run National Savings & Investment, a savings product which requires the investor to tie up their money for three years, but promises to pay out interest of one percentage point above RPI.

Andrew Hagger at Moneynet said: "In recent months more and more people are looking to savings products, but they have been hit by the double whammy of low rates and high inflation. If VAT goes up to 20 per cent they will be hit even harder."

The group that are hit the hardest by high inflation are pensioners, living on a fixed income. David Black at Defaqto, a research house that specialises in personal finance, said: "Savers are faring pretty badly, especially those older people who rely exclusively on their savings. There are lots of accounts paying just 0.1 per cent."

According to the Bank of England the average savings account pays out a mere 0.18 per cent, while the average cash ISA is paying 0.46 per cent.

Ruth Lea, the economic adviser to the Arbuthnot Banking Group, said: "Savers will be sitting on loses. And what is the small saver expected to do? Put it in shares? Well, that's pretty risky. With capital gains tax on the rise, investments as a whole have taken a turn for the worse in recent weeks."

The Consumer Prices Index, the government's preferred measure of inflation which strips out the cost of housing, also increased, climbing from 3.4 per cent to 3.7 per cent. This was a 17-month high and the third consecutive month that it has breached the Treasury's target of 2 per cent by more than a full percentage point.

As a result, Mr King, was forced to write a letter of explanation to the new chancellor, George Osborne.

He blamed higher VAT, a sharp rise in petrol costs and the weak value of the pound, which has forced up the cost of imports. He admitted "inflation has been somewhat higher than expected over the past year and the Committee is conscious that the pace and extent of the prospective fall in inflation are highly uncertain."

Most economists are hopeful that inflation has peaked and will start to fall over the next few months and that the Bank of England will not raise interest rates until next year.

Jonathan Loynes, chief economist at Capital Economist, said: "We continue to expect interest rates to stay where they are for a long time."


Anonymous said...

Anonymous said...

City fears of 'Great Depression Mark II'

Leading City experts have started raising the prospect of "Great Depression II" amid worries that the European economic crisis could trigger a deeper bout of chaos.

Richard Chadfield said...

My opinion nothing more and from one who is ignorant of economics.

What this means is that they is no point in anyone saving and If you have savings cash them in and pay of your debts. Strange isn't it how investors get such small returns when the banks get such large returns. Isn't the average credit card interest charge around 21% pa now? Did'nt we justly use to refer to organisation that charged such rates as loan sharks? (ie criminals)
Inflation is caused by the creation of new money in excess of the creation of new meterial goods for exchange. Increase the amount of money in circulation without increasing the quantity of goods for exchange and you must decrease the purchasing power of each unit of currency. That is inflation. You doubt this. Governments don't. Thats why the standard cure for inflation is (or at least used to be ) to hike interest rates. What does hiking interest rates do? It reduces borrowing. Why is this important. Because banks create the money that is borrowed so hiking interest rates is a means of controling the creation of new money--ie) inflation. Now I understand that some will say that price increases due to ,say, wage rises is inflation. It is not. Inflation is the destruction of the relationship between the amount of money in circulation and goods for exchange. Commodity prices increasing because of ,say, wage increases does not change this relationship. What it does is force people to decide anew how they wish to spend their money. ( ie shell we continue to buy product A at it's new price and no longer buy products B and C or shell we continue to buy products B and C and drop product A)
In conclusion is it a coincidence that inflation is taking off after the previous Labour governments much published policy of 'quantitife easing' (ie printing,creating money) to save the banks and the nations economy through ,using their language, increasing liquidity.
At the start of this post I stated that I know nothing of economics. This is true. But then what do our great economists know? Apparently nothing since under their guidance we stumble from one disaster to another. Clearly economics is not a science.
Richard Chadfield

Anonymous said...

On Tuesday the German Prime Minister Angela Merkal banned such practices from these alien currency speculator spivs, most of them want to destroy White European civilisation. The report below is from a Russian Business News website.

"George Soros Wants To Destroy the European Currency

Soros Fund Management and several other large investment funds started selling the European currency very aggressively"

Anonymous said...

The Jewish vultures are circling over our heads as they smell blood!

"A secretive group of Wall Street hedge fund bosses are said to be behind a plot to cash in on the decline of the euro.

Representatives of George Soros's investment business were among an all-star line up of Wall Street investors at an 'ideas dinner' at a private townhouse in Manhattan, according to reports."

Read more:

Half Soverign said...

Whatever, all this ugliness has a long and lamentable Labour pedigree. For a flavour of how the party responds to defeat, think back to the Crewe byelection, its witless class warfare and its maligning of the Tory victor as someone who opposed "making foreign nationals carry an ID card". Now, with Clegg and Cameron looking like the embodiment of bourgeois bleeding-hearts – all "Big Society" promises and strong talk on civil liberties – some Labour people seem to have come to a truly stupid conclusion: that the Con-Dem coalition has to be outflanked on the right, because the proles demand it. This takes us to what might prove the biggest problem of all: that four ex-wonks with limited life experience may not be the best people to divine what exactly it is that the fabled white working class is after.

This much is clear. After so many years of ever tightening welfare entitlements, and with the City elite seemingly as untouchable as ever, to focus any argument about distributional justice on welfare claimants is borderline obscene. And before any former minister starts to hold forth about the damaging effects of immigration on the social fabric, we could do with contrition that goes deeper than a new drive to "listen", or fuzzy matters of philosophy.

Immigration and welfare have become hot-button issues largely because of the insecurities made worse by New Labour's recurrent refusal to depart from the usual neoliberal script. What of the Blair and Brown governments' long history of resisting European moves on the white-hot issue of agency workers? To securely propel the workless back into employment, what about some meaningful moves on low pay? Why did Labour fail so miserably on social housing? To be fair, some of this may be stirring in the debate: Ed Miliband's claim that "immigration is a class issue" demands real follow-through, as does Burnham's claim that Labour was "in denial" about the impact of immigration on wages and housing. Unfortunately, the latter has also seen fit to talk up immigration's effect on antisocial behaviour: more dog-whistle stuff, and all the more miserable for it.

Yesterday, one more leadership candidate came up with a no-brainer quote, though this one cut to the heart of this week's unpleasantness. "One of the things that made me run was hearing candidate after candidate saying that immigration lost us the election," said Diane Abbott, who is starting to take on a very unlikely air of saintliness. "Rather than wringing our hands about the white working class and immigration, we need to deal with the underlying issues that make white and black people hostile to immigration: things like housing and job security. We need to be careful about scapegoating immigrants in a recession. We know where that leads."

We certainly do. And on these most fundamental of issues, Labour's danger is not that long-imagined lurch to the left, but an ugly and reactionary step in the opposite direction.

Anonymous said...


Undercover at the world's most secretive society: Mail reporter infiltrates shadowy Bilderberg summit where the West's power broke...