UK inflation jumped to its highest level in two years in September. The Consumer Price Index (CPI) rose to 1%, up from 0.6% in August. This is in part due to the falling value of the pound which exacerbated the rise in oil prices, meaning consumers were paying more at the pump. There was also a rise in the price of clothing, although this could be a seasonal rise after the summer sales.
A difficult environment for savers
This rise in inflation comes at a time when the UK base interest rate, set by the Bank of England, is at an all-time low. Many of the banks have followed suit and are cutting the interest rates they offer to their customers. Santander is halving the interest rate on their 123 account in November1, and Halifax has knocked down the interest rate on its Help to Buy ISA.2
It is becoming increasingly difficult for savers to protect the real value of their hard-earned money. Research from Moneyfacts showed that just 266 of the 644 savings accounts currently on the market can beat or match inflation.3 On top of this only 12 of those offer flexible access, so if you might need your money in a hurry your options are limited.
Is it time to start investing?
With less than 2% of UK savings accounts offering flexibility and above inflation interest rates the case to save is getting ever weaker, whilst the cost of living is getting higher. This is at the same time that the UK savings gap is roughly £8,000 per person and expected to grow to £10,000 by 2050.4 Everyone needs to be saving more rather than less. The average 35-year old needs to save £666,000 by 2050 in order to have the same standard of living as a pensioner today.6
Investing is one way to combat this problem; according to the Barclays Equity Gilt Survey you have a 75% chance of an investment outperforming cash over a five-year period.5 Investing comes with different risks to cash savings; as well as the risk of inflation erosion, you take on volatility risk when investing. That means the value of your savings can go down as well as up and you may not get back the full amount you invested. But perhaps there has never been more of a reason to take on this risk and to get your money working harder for you?