Inflation has risen to 5.5% in the UK, up from from its 30-year high of 5.4% at the end of December, putting savers under pressure to eke out a positive real return.
The latest figures from the Office for National Statistics showed the biggest contribution to consumer prices index (CPI) inflation over the past 12 months came from increased energy prices, fuel and food, among others – everyday items that will impact households.
But things could get worse before they get better as the Bank of England now expects CPI inflation to peak around 7.25% in April before easing by the end of the year. “We expect it to be much closer to our 2% target in two years’ time,” the Bank said earlier this month.
CPI inflation since 1989
Source: The Office for National Statistics
Annabelle Williams, personal finance specialist at Nutmeg, said: “There is no way to sugar coat it; the cost of living hasn‘t been this high in 30 years and wages aren’t rising to keep pace.
“Even though figures this week showed that average pay has risen 4.3%, when inflation is taken into account people are seeing a wage cut. This combination means money management is more important than ever.”
Colin Dyer, client director at abrdn Financial Planning, said households would now need to “brace themselves for further acceleration in the cost of living until at least the second half of 2022”, particularly given the energy price hike in April.
The latest rise has mainly been due to high energy prices and increased shipping costs, but there are other causes for concern in the near term.
Rachel Winter, associate investment director at Killik & Co, said consumers should ready themselves for next month’s rise in rail fares, growing mortgage payments and higher national insurance.
She added: “All eyes are also on Russia and Ukraine, where conflict would be likely to push oil and gas costs even higher.”
All signs point to more aggressive interest rate rises by the Bank of England as a result of the latest figures.
JP Morgan Asset Management global market strategist Ambrose Crofton said the hawks had “plenty to feed on” from the latest economic data, suggesting the central bank could raise rates by 25 basis points at every meeting over the next few months. However, some Monetary Policy Committee members may even vote for larger increases, as was the case at the most recent meeting.
“The Bank of England faces a difficult balancing act. It needs to assert its credibility and commitment to bringing down inflation. At the same time it doesn’t want to hamper the nascent recovery given all the work done to support the economy in the past two years.”
For savers, the high inflation figures present a real challenge. Although rates may rise, savings accounts and cash ISAs are some way off paying meaningful interest. The average cash ISA pays just 0.34%, for example.
Les Cameron, savings expert at M&G Wealth, said all current savings accounts, including fixed-term bonds, had rates below inflation and anyone with these, or cash-like products such as Premium Bonds from National Savings & Investment (NS&I), may need to look elsewhere.
“This is especially going to affect people such as those trying to save for retirement, who will now need to save more money in order to still be able to have the retirement that was initially planned,” he said.
Dyer added that investing in a stocks & shares ISA may provide a greater return if investing for the longer term, although people should be comfortable with the inherent risk involved.
However, AJ Bell head of investment analysis Laith Khalaf said while inflation has dominated headlines, markets have not responded as sharply as expected.
“There has been a sell-off in the bond market but, at a yield of 1.6%, the benchmark 10-year gilt isn’t squealing that inflation is a sustained problem,” he said.
Similarly, although there has been a market rotation away from some of the higher valued areas of the market, with some tech stocks down 30% last month, it has not been as widespread as first thought. Indeed, shares in Apple were down just 3.1% while Alphabet dropped 2.5%.
“It is hardly the bloodbath one might have anticipated if inflationary concerns had really bedded in for the long term,” Khalaf said.
Many will turn to the stock market, which he said made “a lot of sense” as companies have the opportunity to pass on higher costs to customers, but he warned that there is no guarantee that stocks will rise over the short term and investors should be comfortable locking their money away for a longer period.