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Inflation rises...again

Saving | Savings Accounts

By Justin Modray, published 22 March 2011.
Helpful? 15

Is it time to think about protecting your savings?

It's little surprise that today's figures show inflation continues to rise. The annual change in the Consumer Price Index (CPI) to the end of February was 4.4%, while the Retail Price Index (RPI), which also includes housing costs, rose by 5.5%. This compares to CPI of 4% and RPI of 5.1% to the end of January.

Higher energy and food prices remain the driving force behind these rises, either directly or by pushing up the costs of other goods and services. Both of these are difficult to predict - food prices are influenced by climate and Middle Eastern tensions will likely cause continued energy price volatility. But I think there's a reasonable chance the prices of both will subside over the next year.

For a more in depth analysis of rising inflation please see my previous article - little has changed. And to see why I don't believe interest rates will rise by much (if anything) in response to rising inflation, see this article.

If you think inflation is here to stay and have savings then the outlook is grim, as at current rates savings are moving backwards, after inflation (i.e. in real terms). Although NS&I Index-Linked Certificates remain off the market, there are a handful of savings accounts available that link your returns to inflation.

ProviderAccountAnnual ReturnTermClosesCandid Review
BM Savings Inflation Rate Bond RPI + 0.75% 3 years 16 May Link
BM Savings Inflation Rate Bond RPI + 1.50% 5 years 16 May N/A
Post Office Inflation Linked Bond RPI + 1.50% 5 years 27 April Link
Yorkshire BS Protected Capital Account Maturity Return RPI + 0.29%* 5 years 5 April Link
* paid at maturity as the change in RPI over the 5 year term plus a single 1.5% bonus.

Whether these types of product prove to be worthwhile remains to be seen. I'm not convinced inflation will remain at current levels for the next 5 years, but if you are concerned (and happy to tie up money) then hedging some of your savings in case it does would be a sensible strategy.

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