Inflation jumps to six-month high in more bad news for savers

Inflation has reached a six-month high, pushed up by higher petrol prices

Inflation jumped unexpectedly to 1.8% in January due to higher fuel costs, putting it at the highest rate since last July.

Rising consumer prices for water, electricity, gas and other fuels were the biggest contributors behind the 0.5% increase from December.

As well as paying more for goods and services, an increase in the Consumer Prices Index is a blow for cash savers trying to preserve the value of their nest eggs.

Data from Savings Champion shows only 50 accounts match or beat inflation, including accounts for existing customers only, down from 492 last month.

All require savers to lock away their cash for a fixed term. Nationwide’s Flex Direct account is the best buy on the market which pays 5% interest for 12 months. The Classic Plus account from TSB did rank second, paying 3%, but has just slashed its rate in half to 1.5%.

Interest rates on savings held in bank accounts have been rock bottom since the financial crisis, meaning the spending power of cash languishing in them is slowly eroded away by rising prices for goods and services.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, says: “Savers have been hit with a double-whammy of falling savings rates and rising inflation. The impact of cuts in savings rates over the past six months has been softened by lower inflation – so now inflation is on the rise, we’re set to feel the pain of the cuts far more acutely.

“It means we need our cash to work as hard as possible if we’re going to stand a chance of beating inflation.”

Coles recommends savers see their nest egg as a number of slices of cash – depending on what it is for, starting with an emergency fund of three to six months of expenses in a competitive easy access account.

“After you could fix some of it for one year and earn 1.65%, some for two years at 1.8%, and some for five years at 2.1%,” she says.

“If you’re putting the money aside for 5-10 years or more it’s worth considering investments. These will rise and fall in value over the short term, but over the long term they have the opportunity to take advantage of growth and income from the stockmarket and stand a better chance of beating inflation.”

However, market watchers predict the jump in inflation is temporary, and expect no reaction from the Bank of England.

“This rise in inflation against expectations is mostly due to energy and oil prices, which we expect to wash out of the numbers in coming months as recent data has shown,” says Hinesh Patel, portfolio manager at Quilter Investors.

Robert Alster, head of investment services at Close Brothers Asset Management, adds Brexit still calls the shots on interest rate decisions or big budgetary moves.

“The Bank of England will be trepidatious about bold monetary decisions until the scale of this post-EU disruption is known,” he says.

“A similar approach is expected to be taken by the new Chancellor on 11 March. Rishi Sunak is likely to use the Budget to announce a welcome boost to longer-term investment, but abide by the fiscal rules for shorter term spending until the fog has cleared.”