Comment: Inflation above 5%. What now for savers and spenders?

Soaring energy bills and rising food prices have driven inflation over 5% in the month of September, causing more misery for savers. The retail price index (RPI) has risen to a 20-year high. So, what now for savers who are set to lose out considerably in real terms?

It has been estimated that savers at the basic level of tax would need to be investing at a rate of at least 6.5% to avoid losing out in real terms, and greater still for higher rate taxpayers. However, the low base rate set by the Monetary Policy Committee to aid growth is leaving very few products available at a percentage that can offset the high inflation rate.

What are the options?

One option is for savers to find accounts specifically linked to the cost of living.

An inflation-linked account, offered by the Post Office and Santander amongst others, tends to guarantee the RPI rate plus a modest return dependent on the duration of the investment. One might expect an additional .25% for a four year account, or an additional 1% for six years or more.

Another option might be a high-return investment plan, though these are subject to a degree of risk.

The more stable product range along the same lines is a long-term fixed-rate ISA.

Big Spender?

The tide is drawing in for savers, but it seems that people are also learning to spend more responsibly. Earlier this month, the UK Cards Association issued trends in customer repayments on credit cards.

Outstanding debt on credit cards is reported to be currently £57 billion, down from a peak in 2006 of £69 billion. Credit card debt accounts for less than 4% of the £1.45 trillion owed by UK consumers.

Apparently, one third of credit card debt is paid off in the month in which it is spent, while 62% of credit card holders pay off in full each month (up from 54% in 2003).

This prudence is also reflected in Australia. In a recent poll of 1,200 Australians, only a quarter expressed any willing to make substantial purchases in the coming festive season, while most seemed more concerned about reducing debt.

This show of austerity is all good and promising, but a report from Equifax shows a different picture: those who struggle to clear their debts. Many Brits have credit card debts that will take months to repay.

In their survey of over 2,300 adults, almost two thirds reported using credit cards for daily expenses and close to 30% were unable to pay more than 25% of their card balance each month. Such figures suggest that consumers have come to rely on credit cards for everyday spending, regardless of their debt situation.

Solutions?

Consumers struggling with debts could benefit from a 0% balance transfer. News this week shows that banks are responding to consumer trends to flip balance transfers by offering longer 0% deals, up to 22 months in some cases.

Meanwhile, competition is beginning to increase for instant access bank accounts. Derbyshire are setting the pace this week at 3.16% with unlimited withdrawals. Their owners, Nationwide, have launched more products for their Smart range for children.

Financial bodies remain unconvinced that these rates will last, as banks and building socieies struggle to find fresh sources of income. But the Bank of England does expect inflation rates to cool significantly in 2012, which may offer some consolation to savers who continue to be disadvantaged by the current economic climate.

Keith McDonald
Which4U Editor