Interactive Investor

Nowhere to hide from rising inflation for those on fixed incomes and savers

17th November 2021 08:28

Rebecca O'Connor from interactive investor

UK inflation hits 10-year high.

The Consumer Prices Index (CPI) rose by 4.2% in the 12 months to October compared with 3.1% in September, its highest rate for 10 years, according to the latest inflation report from the Office for National Statistics.

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “For pensioners and others on limited incomes, this level of inflation is hard to cope with. Careful budgeting only gets you so far. Those already on the cheapest possible deals, the lowest tariffs and buying the cheapest food have very little wiggle room. There’s nowhere left to hide. You will always be spending something on food, energy and fuel if you drive and these are among the categories where prices are rising the fastest.

“The state pension will rise next year by September’s inflation figure of 3.1% after the government stuck with the plan to ditch the earnings link of the triple lock guarantee for a year. Economists had predicted that September’s inflation rate would look low compared to the inflation on the cards this winter and into 2022. It now looks way behind the rising trend. Those dependent on the state pension will therefore find the essentials they need for basic living harder to afford.

“For savers, higher inflation erodes savings to the point where it becomes hard to justify keeping anything but the minimum in an emergency savings account if you don’t want to lose the value of your savings in real terms. Inflation is now more than 4x higher than the interest rates paid on easy-access savings accounts.

“A rise in interest rates to combat inflation feels inevitable and it will need to be effective in countering the pressures that are driving price rises relatively quickly to prevent more difficulties for struggling households.

“Anyone looking to put money away safely will have to effectively give up the prospect of real returns until inflation is under control and interest rates are off the floor.

“For people willing to consider putting their money to work for longer and who are happy with a degree of risk, the stock market can offer a better chance of longer-term growth that could beat inflation. However, inflation also makes it harder to find growth investments at an acceptable level of risk. It also erodes the value of pension funds for younger workers trying to build up a pot that will see them through retirement.”

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