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Savers Worried as Only 3% of Accounts Beat Inflation

We talked to savers about their views on the latest inflation figure - and whether they have started to feel the effects of the rising cost of living

Karen Kwok 17 February, 2017 | 2:31PM

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The rising cost of living is stopping consumers from making regular savings, Morningstar has found. Only 3% of savings accounts on the market now can beat or match inflation, and with inflation expected to rise it is only going to get worse.

Last month the official UK inflation level, as measured by the Consumer Price Index, rose to 1.8%, up from 1.6% in December, according to the Office of National Statistics. The uplift was due to a 5.7% jump in transport costs in January over 12 months, driven by rising fuel prices.

In addition to the rising oil prices, the shortfall in Sterling is leading to higher import prices and a higher price on the high street, says Ariel Bezalel, manager of the Jupiter Strategic Bond Fund. Bezalel predicted that inflation in the UK could go to above 3% in the medium term.

Savers are being hit doubly hard by the rise, as only 23 of 697 savings accounts currently on the market can beat or match inflation – just 3%. All of these are fixed rate bonds, data provided by Moneyfacts.co.uk showed. Compared to a year ago, there were 662 savings accounts of 837 on the market that could beat the 0.3% rate of inflation at that time.

Despite strong UK economy data it will take a while before the Bank of England puts rates up, thanks to concerns around Brexit in two years’ time, said Richard Woolnough, Manager of the M&G Optimal Income Fund.

“I think the Bank of England has got various measures it needs to do first, said Woolnough. “They have been buying corporate bonds and that programme is way ahead of schedule might come to a close soon before we're going to put rates up.”

Jupiter’s Bezalel echoes Woolnough’s views, saying that the Bank seems to think that higher inflation is a transitory status. However he concedes there are a number of Monetary Policy Committee members who are in favour of raising rates.

Inflation Builds Globally

The reflation story is shared across the world. In the US, the core Producer Price Index rose 1.6% in the 12 months through January. This is inevitably driven by President Donald Trump’s aggressive talk about simulative policies, which raised the market expectation on future growth, said Jupiter’s Bezalel.

This week US Federal Reserve Chair Janet Yellen hinted that more interest rate increases were on the way, thanks to the improved jobs market and rising inflation showing signs of nearing the central bank’s 2% goal.

Inflation in Europe is also on the rise, up to 1.8% in January, with the reading hitting a four-year high. This is up from 1.1% in December.

Nick Mustoe, chief investment officer of Invesco Perpetual believes that inflation is a medium term risk that is always the “bogie man” for income assets. Therefore he advised investors to find companies that are going to grow their dividends over time to hedge against inflation.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Jupiter Strategic Bond I Acc101.47 GBP0.11
M&G Optimal Income GBP A Acc209.38 GBP0.24
About Author Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk