Good news for savers as inflation falls to 1.5%

Falling cost of clothes and fuel caused the slump

The spending power of savers' cash has gone up as inflation fell to 1.5% in March, according to the latest figures from the Office for National Statistics (ONS).

The Consumer Prices Index (CPI) inflation measure was 1.5% in March, down from 1.7% in February – the largest fall in the last 12 months. 

The ONS’s alternative measure, called CPIH, which includes housing costs, also fell from 1.7% to 1.5%.

The drop is mostly due to falling clothes and fuel prices.

Petrol prices fell by 5.1 pence per litre between February and March, the largest monthly fall in petrol prices since December 2018. Meanwhile, the price of clothing fell 1.2% in the year to March.

Mike Hardie, ONS head of inflation, says: “Clothing prices normally rise between February and March as new year discounting ends. However, this year the price of clothes has eased due to some retailers offering discounts due to decreased footfall in stores before the lockdown started.

“The cost of raw materials for manufacturers fell significantly over the year, driven by a global fall in the price for crude oil, which is at its lowest level since early 2016.”

The ONS says the data was collected on 17 March, when coronavirus was leading many to stay home but six days before the official lockdown began.

This means fewer people would have been browsing in physical clothes stores. Lockdown also means consumers might be less likely to spend money on clothing, as they are indoors most of the day.

Impact on savings

A fall in inflation is good news for savers, as it means the interest they earn on their cash is more likely to beat the rising cost of goods and services as measured by inflation.

Since last month the number of deals able to outpace inflation has risen, from 26 that beat 1.7% to 65 that beat 1.5%, according to figures from Moneyfacts.

However, after the Bank of England cut base rate to 0.1% last month, providers have been lowering savings rates in response and reducing the number of good deals on offer.

The average easy access rate for someone with £5,000 has fallen from 0.56% in March to 0.44% now.

NatWest, Halifax, Lloyds Bank and Scottish Widows Bank have all cut their easy access rates to 0.01%.

Meanwhile, Goldman Sachs has also cut the rate on its once table-topping Marcus account from 1.3% to 1.2%.

There currently no easy access accounts which beat inflation. Data from Moneyfacts shows that out of the 65 savings deals that beat inflation, 57 are fixed-term bonds.

One of the highest paying bonds is from RCI Bank at 1.9%. This five-year bond requires a £1,000 deposit and can be opened online.

Vanquis Bank has a three-year bond which pays 1.8% and can be opened online with a deposit of £1,000.

Rachel Springall, finance expert at Moneyfacts.co.uk, says: “Savers may well be keeping their cash close to hand right now, so convenience could be taking over any ambitions to get an inflation-beating return. 

“Savers must also review any accounts they currently have and switch if they are on a poor rate, and there may well be many people in this position considering the flurry of cuts already made or in the works."

What next for inflation?

Andrew Wishart, UK economist at Capital Economics, predicts inflation will fall to 0.9% in April as Ofgem lowers the cap on utility bills to reflect past falls in wholesale energy prices.

He says: “The disinflationary pressure of weak demand in the aftermath of the coronavirus recession due to the fall in employment and consumers remaining cautious will add to the downward influence from very low energy prices, pulling inflation down to just 0.5% in the second half of this year.”