Savers Advised To Shop Around For Higher Rates As Inflation Hits 3.5%

Official figures have shown that the UK inflation rate rose to 3.5% last month, marking the fastest annual rise in 14 months – up from 2.9% in December.

Consumer Prices Index (CPI) inflation was driven up by a combination of the VAT rate reverting back to 17.5%, together with increasing fuel prices.

Retail Prices Index (RPI) inflation which takes housing costs into consideration, increased to 3.7% in January, up from 2.4%.

A letter of explanation from the Bank of England governor Mervyn King was sent to the chancellor – a practice that is required in the event of inflation rising more than one percentage point higher or lower than the government’s 2% target.

The governor’s letter highlighted that the rise in inflation was “temporary”.

Mr Darling’s response noted that the inflation outlook was “subject to some uncertainty” as the world begins to emerge from the “deepest downturn in modern times”.

CPI inflation is the measure targeted by the Bank of England’s rate setters, and the RPI rate tends to be used as a benchmark in wage negotiations.

According to the Office for National Statistics , the rise in VAT was the most significant factor that helped push the CPI to 3.5%.

The government had cut VAT to 15% for 13 months in an attempt to stimulate the economy and boost consumer spending.

The Bank of England had anticipated inflation rising to 3.5% in 2010, but it has already made predictions that it will fall back below the target of 2% later this year.

Most economists believe the Bank will continue to keep interest rates down in order to lower inflation faster.

The Bank of England base rate has been at the record low of 0.5% for 11 months in a row.

The combination of both an increase prices and reduction in rates is punishing savers, as the value of their funds is being eroded while the interest they earn is declining.

A basic rate taxpayer is taxed 20% income tax on any returns they earn from a standard savings account and 40% for higher-rate taxpayers, so couple this with the rate at which the value of their savings are falling (based on inflation), and you can quickly see that a high interest savings account is required simply to ensure you’re money is safe.

Low savings rates combined with spiralling inflation means a number of bank accounts are now effectively worthless.

This is why it’s imperative that savers shop around for the highest interest on savings to maximise returns.

The same applies to anyone that regularly has money in a current account, as rates tend to be low on these accounts but it doesn’t have to be, and you can actually qualify for high rates on lower amounts, for example the Santander Current Account offers 6% on balances of up to £2,500, so this account would be ideal for anyone that has their salary paid into an account while using direct debits and standing orders to pay bills etc.

There are several different types of savings accounts, each holding their own advantages and designed to suit different savers. The Individual Savings Account (Isa) should be your first port of call, as they provide all individuals with an annual tax-free allowance which can be deposited each year without having to pay tax on the interest earned. There are a number of rules around Isas, so for more on this see Which4U’s Isa Accounts page.

Some of the highest rates offered can be taken advantage of by those that are willing to lock their money away for at least a year in a fixed rate savings bond.

Santander, for example, is paying 3% on its one-year fixed rate bond, while the rates rise as the term increases, with an ICICI fixed rate bond you could earn 4.25% on a two-year term and up to 4.70% for three years.

Always keep a close eye on the rates that you’re accounts are at, as in some cases they can change, especially when an introductory rate comes to an end without you being aware. If they do fall below the going rate and you are able to switch accounts, don’t be afraid of shopping around.

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Filed under: Best Cash Isa Rates

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