Lockdown savings at risk

The impact of higher inflation on both people’s ability to save and also on the value of savings creates a kind of vicious circle, explains Rebecca O' Connor.

Consumer Price Index (CPI) inflation rose to 0.7% in the 12 months to March, up from 0.4% in the year to February, with the rising price of fuel and clothing pushing up prices in the month that saw the end of the strictest lockdown measures.

Petrol prices were 3.5% higher in March this year than March 2020, according to the ONS.

The ONS said that the rise in the price of clothing and footwear in March was largely down to a ‘fall back in discounting’. Meanwhile, the cost of food including bread, cereals and confectionery fell. 

Becky O’Connor, Head of Pensions and Savings at interactive investor, said: “One of the notable consequences of lockdowns has been the rise in accidental savings.

“The healthy savings pots built up by some, during months of being stuck at home, are now at more risk of erosion from inflation.

“A rise in inflation means that money held in savings accounts with interest rates below the rate of inflation is losing value in real terms.

“For spenders with an appetite for normality, it also means that the things people typically spend money on are becoming more expensive, further eroding their ability to put money aside for the future every month.

“The impact of higher inflation on both people’s ability to save and also on the value of savings creates a kind of vicious circle.

“For those who want to continue to feel the long-term benefit of savings they made during lockdown, higher inflation presents a challenge. It may be that for money not needed in the next few years, investing in an ISA or pension could represent a better opportunity to grow your money in real terms [rather] than keeping it in cash.”

According to a poll carried out by interactive investor earlier this year, more than a quarter (28%) of people said they plan to maintain their current saving and investment levels rather than spend more as lockdown eases.

More than half (59%) of people said they expected to start spending again as lockdowns ease, with 44% expecting to spend more as a natural consequence of the economy opening up, and 15% saying they are actively planning to spend more.

Only 13% of investors said they don’t expect to have enough spare cash to start spending more again as the economy opens up.