INFLATION hit a two-year high in December 2016, rising to 1.6 per cent, official figures have revealed.
The main contributors to the increase were rises in air fares and the price of food, but this will leave many savers struggling to get decent returns from traditional financial products and increase speculation of an interest rate rise.
“While it is still below the government’s target of two per cent, increasing inflation not only adds to the cost of the weekly shop, but with interest rates languishing at record lows, the value of people’s savings are being eroded, said Pete Behrens, co founder of RateSetter.
“’Zombie accounts’ pay rates that don’t even match inflation, meaning that many savers are actually losing money in real terms. This might prompt more people to consider putting their money to work, by taking on some risk in order to earn a better return through peer-to-peer lending.”
Data from Moneyfacts shows that just 44 of 660 savings accounts on the market now beat or match inflation, many of which are long-term deals.
Read more: More pain for savers as Bank of England warns of skyrocketing inflation
The inflation rate was above expectations for the consumer price index as the consensus had been for a rise to 1.4 per cent from 1.2 per cent in November 2016, while research firm IHS Markit had forecast 1.5 per cent.
“We see inflation likely moving above its two per cent target rate during the first quarter of 2017, then rising to three per cent in the latter months of this year and peaking around 3.3 per cent early on in 2018,” said Howard Archer, Chief UK and European economist for IHS Markit.
“It looks inevitable that consumer purchasing power will deteriorate markedly over the coming months as inflation moves appreciably higher and earnings growth is limited.”
Archer said he expected the Bank of England to be “pretty tolerant” if the rate of inflation overshoots its target and is unlikely to hike the base rate any time soon.
“We retain the view that the Bank of England will keep monetary policy unchanged not only through 2017 but also through 2018 at least,” Archer said.
“We believe the Bank of England will be pretty tolerant on the probable appreciable inflation overshoot given the prolonged, highly uncertain outlook that the UK economy is likely to face as the government negotiates the exit from the EU.
“However, given major uncertainties over the UK economic outlook as Brexit gets underway and develops, nothing can be ruled out.”
Read more: Low interest rates spell bad news for savers