BRITS could end up paying £34 for every £1,000 in their saving accounts as inflation is set to soar to 4%.
Inflation might hit the highest level in a decade this year and that – along with low interest rates on cash accounts – could hurt your savings.
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Inflation is a measure of how much the price of goods, such as food or televisions, and services, such as haircuts or train tickets, has changed over time.
It is currently 2.5% but is forecast to soar as the UK economy recovers from Covid.
The Bank of England warned this morning that inflation is expected to reach 4% by the end of 2021.
According to calculations by investment platform AJ Bell, this could cost you £34 for every £1,000 in your rainy day fund.
A saver with £1,000 stashed away in an easy-access cash account that pays an interest rate of 0.6% would make just £6.
But inflation means that £1,000 today would be worth 4% less in a year’s time – or £40.
That works out at £34 lost for every £1,000 saved in a low return bank account.
Laura Suter, AJ Bell’s head of personal finance, said: “With the top easy-access cash account currently paying 0.6% savers really need to question whether they need all the money they’re holding in cash.
“At that rate and if inflation hits 4%, savers will pay £34 a year on every £1,000 they have saved, just for the pleasure of keeping it in cash.
Why does inflation matter?
INFLATION is a measure of the cost of living. It looks at how much the price of goods, such as food or televisions, and services, such as haircuts or train tickets, has changed over time.
Usually people measure inflation by comparing the cost of things today with how much they cost a year ago. The average increase in prices is known as the inflation rate.
The government sets an inflation target of 2%.
If inflation is too high or it moves around a lot, the Bank of England says it is hard for businesses to set the right prices and for people to plan their spending.
High inflation rates also means people are having to spend more, while savings are likely to be eroded as the cost of goods is more than the interest we’re earning.
Low inflation, on the other hand, means lower prices and a greater likelihood of interest rates on savings beating the inflation rate.
But if inflation is too low some people may put off spending because they expect prices to fall. And if everybody reduced their spending then companies could fail and people might lose their jobs.
See our UK inflation guide and our Is low inflation good? guide for more information.
“Clearly cash is key if you need short-term savings or don’t want to risk your money on the stock market, but we’re a nation of cash hoarders and many people are holding far more than they need.”
She added: “What’s more, UK households currently have £240billion in accounts paying no interest, so at the very least these savers should get the best returns they can – although with such dismal rates on offer it’s understandable why savers can’t get too excited to switch.”
You could consider moving your savings into an account with a better interest rate to avoid losing money.
But make sure you compare the pros and cons of different kinds of savings accounts before you open one to make sure it suits your needs.
Websites such as Moneyfacts.co.uk and MoneySupermarket can help you compare different savings accounts.
Easy access savings accounts, notice savings accounts, regular savings accounts, individual savings accounts (ISAs) and fixed rate bonds are the options available to consumers.
Some have high interest rates but are inflexible about when you can access your money.
Others – like easy access savings accounts – have lower interest rates but will allow you to withdraw cash whenever you need it.
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