How will higher inflation affect your cash savings?

Last week the Bank of England warned that inflation could reach 2.7% in 2017. This is bad news for many cash savers – inflation can eat away at your savings over time and interest rates are currently at all-time lows. Fortunately there are other options that could help you to beat ‘the silent killer’. 

Sam Coppin
14 November 2016

Inflation is on the rise

Consumer Price Index inflation has risen by 0.8% so far this year according to the Office for National Statistics. This is largely due to the weakness of the pound since the Brexit referendum, with the effects starting to be seen in the prices of products such as Apple laptops and Marmite.

Inflation is forecast to continue rising next year. The Bank of England expects it to reach 2.7% by the end of 2017, whereas estimates from the National Institute for Economic and Social Research are closer to 4%.

Inflation erodes the real value of your savings

When inflation rises the real value of your money goes down – so you can buy less with it. This can have a big impact on your savings over time. Data from the Office for National Statistics shows that if you had saved £1 in 1995 it was actually worth just 68p by 2015.

Interest rates aren’t keeping up

Inflation wouldn’t be a problem if interest rates kept up. But they’re currently at all-time lows after the Bank of England cut its base rate to 0.25% in August. This means cash savers are suffering from both lower returns and higher prices.

What can you do?

If you can tolerate some investment risk, you could consider moving some of your cash savings into investments to get your money working harder for you. Investments have the potential to outpace inflation over the long term (but you could also lose money). Our Top-rated Funds is a free guide that lists the funds that our research team believes are most likely to do well for you.

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