Rising inflation leads to more savings accounts underperforming

Savers should reconsider the rates on their savings accounts after a rise in inflation means that many are now underperforming.

The latest data suggests that the number of savings accounts beating inflation has tumbled from 110 to just 58.

This is the result of a slight rise in the Consumer Price Index which went up to 2.1 per cent in July – up from two per cent in the previous month.

With Instant Access accounts paying 1.5% on average, some experts have suggested that savers should consider fixing their cash savings accounts for 1-2 years to beat inflation in the mainstream market.

Based on a 1, or 2 year fixed term cash bond, currently you can achieve up to 2.07% in a 1 year bond and up to 2.45% in a 2 year bond. However, if you cash one of these bonds in early, there may be penalties for doing so. Therefore, it is important that you keep some of your cash in an instant access account to cover any short term cash emergencies.

Savers are being encouraged to review their current cash savings to see whether a switch is necessary and seek professional independent advice to make the most of the money they hold.

Link: Inflation and price indices

Although you need easy access cash to cover basic expenses and emergencies it is important to ensure that longer term cash savings are protected from the effects of inflation as demonstrated in the chart below. This assumes that the average inflation rate is 2% per annum and that the gross average interest rate is 1.5% per annum.

These rates do not offset inflation so capital will be losing its purchasing power e.g. currently RPI is at 2.9% p.a. therefore, cash in the Bank would after 5 years be worth £10,252 but you would need £11,536 to offset inflation.

 

 

 

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