MORE pressure was heaped on savers seeking decent returns in January as inflation reached a 31-month high of 1.8 per cent, Office for National Statistics figures have revealed.
The cost of living rose from 1.6 per cent in December 2016 to 1.8 per cent in January 2017, just below economists’ expectations of 1.9 per cent but closer to the Bank of England’s target of two per cent.
The rise was driven higher by rising fuel and food prices, but it is savers who many feel are set to continue suffering.
“Each increase in inflation ratchets up the pressure for people saving and investing their money,” said Rhydian Lewis, chief executive of RateSetter.
“The idea that money in most savings accounts is actually losing its purchasing power is a sobering thought, and with no end in sight for low rates, we’re seeing more and more people considering investments which carry risk, such as peer-to-peer lending, for money that they want to see grow.”
Richard Wazacz of Octopus Choice warned savers are almost no worse off keeping their money under the bed.
“You’re now almost no worse off putting your cash under the proverbial mattress,” he said.
“With another month of rising inflation coupled with ultra-low interest rates, UK savers are seeing their money being gradually whittled away in real terms.
“For particularly pensioners and those saving for a rainy day, inflationary pressure is an unvarnished reality for the short to mid-term.”
Read more: Overcoming inflation
As well as low savings rates, consumers are also suffering from low wage growth, Dominic Baliszewski, director of consumer strategy for financial management app Momentum UK, has warned.
“It’s an unusual situation when the average pensioner has a greater income than the average working person, but this is the reality,” he said.
“To combat these challenging conditions, people need to use everything at their disposal to manage their money effectively, from free advice services and online money-saving tips to financial apps which log spending and help users to budget.”
Savers may not be in for much respite, with analysts expecting inflation to go above the central bank’s two per cent target due to the weakening of the pound and higher oil and commodity prices.
“The odds look stacked in favour of inflation moving above earnings growth during 2017,” said Howard Archer, chief UK and European economist for research firm IHS Global Insight.
“Not only do we see inflation rising above three per cent by the end of the year but we suspect that pay growth will slow as companies looking to contain their total costs in a challenging environment and as their imported input prices are lifted by the sharply weakened pound.”
Despite this, Archer said he expected the central bank to hold off from raising interest rates until 2019 at the earliest.
However, the government didn’t seem too concerned by the data.
“Employment has reached record levels and earnings have risen faster than inflation for more than two years,” said a Treasury spokesman.
“The government appreciates that families are concerned about the cost of living and that is why we are cutting taxes for millions of working people and have frozen fuel duty, saving an average driver £130 a year compared to previous plans.”
Read more: How to prepare financially for 2017