Rising Inflation Puts Squeeze on Savers

Rising Inflation Puts Squeeze on Savers

by Rebecca Hall on 20 May, 2011

Continually rising inflation is squeezing savers ever harder, with higher rate taxpayers now needing to obtain a 7.5% interest rate in order to beat it.

Already feeling the pinch, as the CPI (Consumer Price Index) hit 4.5% in April it has become even more difficult to make a return on savings, with the majority actually losing money. A basic rate taxpayer has to obtain a 5.63% interest rate to beat inflation, a difficult figure to hit in the current savings market.

Failing to get an inflation beating savings rate means that the value of the money being saved actually decreases thanks to prices going up. Savers have already been hit by a historically low base rate of 0.5% as set by the Bank of England as one of the measures for kickstarting the economy following the financial crisis of 2008. Although this makes it cheaper to borrow (and therefore to start a business) it means that anyone hoping to make some extra cash from saving is unlikely to be able to, certainly not without locking away their money for 5 years or more.

The irony is that although the root cause of the crisis is thought to be ballooning debt, the low interest rate is designed to make people spend money rather than save it.

With inflation continuing to rise, savers are being hit from both sides, putting pressure on the Bank of England to increase the base rate. However, the Bank is caught between stimulating business by making credit cheaper and ensuring consumers have the cash to spend in these businesses (thereby allowing them to pay their cheap loans back). As it stands, most people are simply watching the value of their nest eggs and wage packets steadily falling, with little chance of recovery in the near future.

The current situation is delicate to say the least. Savers would be well advised to ensure as much money as they can spare is locked away for as long as they can spare it. That is the only way to retain the value of their earnings over the next few years.

About the Author

Rebecca Hall


Rebecca Hall worked as an independent mortgage adviser for 10 years before turning to financial journalism full time. She has strong links to the CAB advising families on mortgage refinancing.