Interactive Investor

Inflation hike leaves consumers with eroded cash pots

19th August 2020 14:59

Liz Bury from interactive investor

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Savers face an 80% drop in the number of inflation-busting deals on the market due to the cost of fuel rising.

Savers face an 80% drop in the number of deals that beat inflation, which has risen to 1%, according to the latest government figures.

The relatively sharp rise in inflation for July, up from 0.6% in June, was driven mostly by fuel prices.

The cost of fuel has been climbing since the start of June. A litre of petrol rose 4.9p and the price of diesel was up 4p between June and July.

It was the sharpest monthly upturn in fuel costs for nine years.

Inflation is also rising due to an increase in the cost of clothing, footwear, household goods and maintenance. The price of health services such as dentistry and physiotherapy, as well as alcohol and tobacco, also increased.

But the rise puts savers at a disadvantage, especially as interest rates on many savings deals halved this year.

The object for many savers is to earn a rate that beats inflation. In June, 440 deals paid above this rate, but now just 91 do, a fall of 79%.

A sustained rise in inflation means that many savers will see the spending value of their cash pot eroded over the coming months.

Inflation was running at 0.8% in April and 0.5% in May, and has now increased two months in a row, according to the Office for National Statistics.

“There’s been a lot of upheaval because of coronavirus and businesses may look to put up prices to cover that,” says Andrew Hagger, personal finance expert at MoneyComms.

“Fuel can have a big impact because many rely on deliveries. You’ve also got some companies going out of business, so less competition meaning prices could go up,” he says.

People with relatively small sums of several thousand pounds in savings will see only limited erosion in the value of their cash at present.

But a bigger challenge is on the way if inflation continues to rise.

“If inflation does take off, it will become more serious,” Hagger says. “The important thing with cash savings is to have a safety net, usually about three months’ salary, that you can get your hands on quickly in an emergency.”

An upturn in inflation was not anticipated by the Bank of England this year. 

Although its inflation target is set at 2% for 2020, it had forecast a rate of about 0.25% for the second half, “largely reflecting the direct and indirect effects of Covid”.

A return to more normal levels of inflation of around 2% was not expected until 2022.

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