According to the ONS, inflation has hit a 40-year high, but why has there been a rise in inflation? And what does this mean for savers?
Energy And Fuel Power Inflation
The cost of gas has almost doubled in a year and electricity prices are up by around half. Forecasts for October’s price hike are piling on yet more misery, with predictions it will be up an incredible 65%.
June 2022 was a horrible month for drivers with fuel prices hitting highs on a daily basis. During the month, petrol price inflation hit an incredible 41.8%. Diesel car drivers were in even more trouble, with diesel up 44.2%. Both were at a record high.
One of the major problems with rising fuel and energy costs is they feed through into anything that has to be manufactured, stored, transported or sold. It essentially means these price rises are feeding into to everything.
Food and non-alcoholic drink prices were rising faster again; up 9.4% in a year. They made the second biggest contribution to the rise in inflation after transport. There have been some really worrying rises in prices of some staples. This includes low fat milk (up 26.3%), butter and margarine (up 21.5%), pasta (up 15.9%) and poultry (up 14.9%).
It is coming as a shock to the system after so many years when supermarkets pushed hard to keep prices down. Right now, around half of us are paying more in order to buy the food we always have (48%), and around half are having to buy less (49%). The proportion who are forced to buy less has mushroomed from 8% in September. And as prices keep rising, we can expect more people to have to start abandoning food at the till and making incredibly difficult decisions about the food they can no longer afford.
Anyone who is dreading the prospect of flying this summer and spending a good portion of their holiday in the airport, has to deal with the added insult of having to pay a fortune for the privilege. Flights have gone up 22.4% in a year, adding to the rise in inflation.
If you decide to holiday closer to home, or you’re forced to because of last-minute changes, you could be hit by even higher inflation. A UK break in a campsite or holiday centre is going to cost you 24% more this year. If you opt for a hotel, meanwhile, not only will you pay more, but you’ll face a 14% hike in prices.
What This Means For Savers
The gulf between inflation and savings rates means every penny we save is losing value after inflation. Savings are still incredibly valuable. When life throws us nasty surprises, having something to fall back on can be life-changing. It means ideally anyone of working age still needs to be working towards 3-6 months’ worth of essential expenses in a competitive easy access savings account for emergencies.
However, if you’re among the four in five savers with their money languishing in easy-access accounts with the high street banks, you can’t afford to sit and wait for them to do the right thing. The highstreet giants have passed on an small fraction of the rate rise to savers. One bank hasn’t moved at all from the rock bottom of 0.01%.
To help close the gap on inflation, any money you need for planned expenses in the next five years still needs to be in savings. But it can be fixed in return for more interest. Right now, the short-term fixed-rate market is offering particularly competitive deals. This is because smaller and newer banks compete hard for your one-year fixed term savings.
If you have savings you won’t need for five years or longer, consider making an investment. These will rise and fall in value over the short term. However, over 5-10 years or more they stand a much better chance of beating inflation than cash savings.
The rise in inflation will impact your savings, so you need to act now.