The current high levels of inflation are having a wide range of effects on our financial lives, not least on our savings.
While many savings accounts are increasing their interest rates as a response to the Bank of England raising the base rate, new research suggests that many financial products aren’t keeping pace with price rises.
The effect of this, according to the new study by Standard Life, is that the “purchasing power” of savings will plummet if inflation continues to rise.
Inflation is predicted to hit 11 per cent or more this year at its peak, as consumers deal with rising food prices, higher transport costs and crippling energy bills.
Standard Life’s analysis has revealed that an individual with £10,000 in savings, earning 1.5 per cent in interest, could see their “buying power” effectively cut to just £8,910 after two years of seven per cent inflation.
Even if inflation was cut to the Bank of England’s current target inflation level of two per cent, an individual’s purchasing power will be reduced to £9,894 because the rate offered on their savings is not keeping pace with rising prices.
However, as inflation is meant to rise higher than seven per cent matters could be much worse, with the study suggesting that a sustained two-year period of inflation at 10 per cent could cut spending power in the first year to £9,135 and further to only £8,345 in the second year.
Given the potential for inflation to remain high for a longer period than expected, this research highlights the need to seek professional financial advice to ensure the money you save and invest works in your best interest and isn’t eroded significantly by inflation.