Strain on households persists as inflation holds steady
INFLATION remained at a five-year high of three per cent last month, putting continued strain on the budgets of UK households.
Economists suggested Consumer Price Inflation (CPI) has now reached a peak, but warned the headline figure masks an increase in the price of basic necessities.
Growth in the cost of living rose to 4.1 per cent in October, the highest rate since September 2013, which impacts poorer people in particular.
Kate Smith, head of pensions at Aegon, warned people are facing a “triple whammy” of squeezes in their purse: high inflation, little sign of wage growth and rising interest rates.
“This combination of factors is putting a strain on households and inevitably makes saving a challenge,” she said.
Smith suggested that when employers’ auto-enrolment contribution doubles from next April, many will struggle to justify lifting wages.
But Alistair Wilson, head of retail platform strategy at Zurich, said wages are likely to increase by between 2.5 and 3.5 per cent next year, meaning the worst of the squeeze on family finances could be coming to an end.
He added: “As we look ahead to the Budget, it may be that some of the positive noises we have heard thus far are confirmed, easing the pressure on savings. In the meantime, it’s vital people review their spending habits to consider how to make their money work harder and ensure they are putting some aside.”
Meanwhile, Jacob Deppe, head of trading at online trading platform Infinox, suggested the latest inflation data is likely to ease the pressure for another interest rate rise in the next few months.
UK interest rates were lifted for the first time in a decade earlier this month, from 0.25 to 0.5 per cent, but so far very few banks have passed this onto savers.
RateSetter noted in a blog post last month that banks are not obliged to pass on changes in the base rate and, even if they do, returns will continue to be eaten up by high inflation.
It comes after IHS Markit and Visa’s UK consumer spending index revealed a two per cent year-on-year decline in spending during October – the quickest rate of decline since September 2013.
Stuart Law, chief executive and founder of Assetz Capital, said inflation is likely to fall very slowly over the next year or two but this would “provide little comfort to savers” who are “losing money” on their savings due to low interest rates.
“The recent base rate rise will also have driven up borrowing costs, whilst not passing much on to savers so, with inflation perhaps falling slowly now from three per cent, this rise may have been implemented prematurely,” he added.
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