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How inflation is battering savers

We’ve been hearing a lot in recent months about how inflation has been hitting savers hard, but just how big is the problem? We pulled together some figures to find out.

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With interest rates at all-time lows and the cost of goods increasing at a rate well beyond the Bank of England’s target, savers have been among the biggest losers of the economic downturn.

With this in mind, we’ve taken a look at the last ten years to work out just how bad things are, comparing the Bank of England’s base rate (the rate at which it lends to other financial institutions) with the average rate on instant access savings and the Consumer Prices Index (CPI) measure of inflation. The results have been revealing, but also leave us with a few questions.

Perhaps the most dramatic thing to notice is the huge fall in the Bank of England base rate towards the end of 2008, coinciding broadly with a pretty big spike in inflation. While CPI has fallen back since then, point C on the graph shows just how much savers are suffering – in October, the average instant-access rate was 0.23 per cent before tax, against inflation of 3.2 per cent.

Compare that to early 2000 (point A), where inflation was running low and savers could get hold of rates upwards of 2 per cent. Lucky them, you may think, but what about that huge gap between the savings rate (2.42 per cent) and the base rate (6 per cent)? A saver in May 2000 may have been enjoying inflation-beating savings, but were they also being taken for a ride by our banks?

Martin Ellis, chief economist at the Halifax, says that the comparison tells us more about how desperate providers are for our savings right now. “Savings rates are determined by market conditions and the need for providers to raise sufficient funds to finance their lending activities. There is currently considerable pressure to attract savings from individuals because of the greatly reduced availability of funds from the money markets since the onset of the financial crisis.”

“As a result, there are many fixed rate bond and ISA products that offer rates that are comfortably above Base Rate,” he added. So, in other words, savers could be getting a far worse deal than they are already – as hard as that may be to believe.

Are things about to get better for savers? Not just yet, says Ellis, though he thinks that savers could see a little respite from inflation in the coming year, while rates my finally begin to rise by the end of 2011.

“We expect interest rates to remain very low during 2011, probably with one quarter percentage point rise to 0.75% by the end of the year. We expect inflation to ease during 2011, returning to close to the 2% target.”

Based on figures from the Bank of England and Office for National Statistics (ONS)
Point A = May 2000; Point B = September 2007 (month of run on Northern Rock); Point C = October 2010

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