When inflation rises sharply, interest rates will usually rise to dampen spending. If you have savings, this is good news for you, as higher interest rates will usually mean better returns.
However, if the inflation rate is higher than the interest you’re earning on your savings, then your savings could be worth less this time next year.
Rachel Springall, finance expert at financial website Moneyfacts.co.uk said: “Despite the fall in inflation, which is measured by the Consumer Price Index (CPI), our research has found that no savings account or ISA can currently match or beat the inflation rate of 2.0%. As well as this, the predicted rate of inflation is expected to reach 3.3%, which means many savers will likely struggle to find any savings accounts that will be able to keep up with the rate of inflation over the coming months.
“There has been a notable uplift to market-leading savings rates on offer since last month across various types of accounts and terms, which is positive to see. However, inflation is eating its way into savers’ hard-earned cash and with the expectation for it to rise, its eroding power will not be easing any time soon. Savers would be wise to not let this deter them from finding a more attractive rate, as deals are improving, and they may miss out on a market-leading rate if they become apathetic.”
A key area where high inflation can really affect people is through the erosion of the value of pension savings. While a lot of people’s savings are transitory, as they are often saving for a big purchase or life event, pension funds are a lifetime investment, and if a large proportion of your retirement savings is sitting in cash earning below-inflation interest rates, you could struggle to make ends meet when you retire. A key way to stay on top of whether your pension fund is beating inflation is to monitor the investment performance of your funds, and if they aren’t meeting the returns you would like, it may be worth exploring other investment options. For more information on this, have a look at our article Where is my pension invested?