The soaring cost of living has made painful headlines once more after the rate of inflation rose again in January.
Consumer Price Index inflation (CPI) rose to 4 per cent, official figures by the Office for National Statistics (ONS) showed. This means the year-on-year increase in the price of everything from cars and fuel to furniture and clothes is even higher than in December, when inflation was 3.7 per cent.
And the Retail Prices Index (RPI), which includes the interest we pay on our mortgages and other housing costs, climbed to 5.1 per cent in January, up from 4.8 per cent in December. So how does all this affect you and what can you do about it?
Many financial advisers argue that your cost of living depends on your age and circumstances, and not a random figure from the government. So, first off, find out how much extra you may be forking out with the ONS inflation calculator.
Shift those savings
Retirees and those approaching retirement are usually the hardest hit by high inflation because their pension income can often be fixed but the cost of everyday life is rising. Increasing contributions to your pension before retiring could help to offset this – particularly if you are a couple of years away from giving up work. Increasing your pension contributions could mean you have a little more coming in every month in retirement.
The other issue caused by high inflation, coupled with low savings rates, is that the real value of the interest you earn on those savings is eroding away.
Now is the time to check the rate you currently earn on your savings accounts, because research from consumer watchdog Which? has found that almost 90 per cent of the savings rates on offer in 2005 now earn just 0.5 per cent interest. And that’s before you take tax into account.
But the good news is that a raft of new index-linked savings accounts have just been launched that could help you cope with inflation nightmare.
Inflation-beating accounts
For those with £500 or more, the Post Office now has a five-year index-linked bond paying RPI plus 1.5 per cent, though you won’t actually get the interest until the bond matures in 2016.
Yorkshire Building Society’s Protected Capital account (PCA) Inflation-Linked Plan 2 offers the same deal for those saving more than £3,000, but you can put this saving into an ISA, to protect it against income tax. You can also transfer any existing cash ISA savings, up to a limit of £85,000.
To help you choose the best cash ISA we've researched the top deals on the market for you.
A word of warning though – with interest rates expected to start rising and inflation set to drop you may not want to tie your cash up for such a long time. If so, Nationwide’s MySave Online plus offers 2.95per cent for savings over £1,000 or Santander, the Post Office and Northern Rock offer 3 per cent on their one-year bonds. And if you prefer to save little and often, you can’t beat the HSBC regular saver, which offers a rate of 8 per cent for monthly payments of between £25 and £250. But this is only open to existing HSBC customers.
Every little helps
All of us can fight inflation by managing costs, so give your household bills the once over. Shop around for the best utility prices and consider taking the chance and fixing your utility bill now to protect you from future rate rises, particularly as energy watchdog Ofgem predicts costs are due to go up by 60 per cent over the coming decade. It’s the same story for food and fuel - consider switching supermarkets to save cash, and use online services such as PetrolPrices.com to help find the cheapest fuel prices in your area and sign this petition to stop rising fuel costs.
To see how inflation has been effecting savings over the last ten years check out our Inflation Vs. Savings graph.
