High inflation: the winners and losers

Financial News

High inflation, the winners and losersThe announcement that CPI (Consumer Prices Index) rose to 5.2% and RPI (Retail Prices Index) moved up to 5.6% in September has caused concern for many.

But exactly who are the losers from high inflation?

Is there anyone who gains?

We thought we’d take a look.


Savers The double blow of high inflation and low interest rates mean that it is now almost impossible to find a savings account which will pay enough interest to beat inflation.

Previously non tax payers and ISA (Individual Savings Account) savers could find rates to give a real return, but with the latest rise there are no traditional accounts, for any type of saver, which provide a return to beat inflation.

Our best buy savings tables show that the highest rate from a traditional five year fixed rate bond is currently 4.60% gross AER. Take a typical saver with £50,000 who pays 20% tax, they are currently ‘losing’ £760 each year due to the affects of inflation. Even a non tax payer is losing £300 a year.

There are still some inflation linked savings accounts, however these are few and far between and only provide a real return above inflation for non tax payers.

Once tax is taken into account the returns are below inflation for taxpayers.

Pensioners Research shows that older generations suffer a higher rate of inflation than both the CPI and RPI figures, this is because they spend a higher proportion of their income on fuel and food, which are both experiencing above average price increases.

Therefore the rise in the basic state pension next April from £102.15 to £107.46 a week, or indeed the increase in other state benefits, is unlikely to be enough to meet the actual rises in the cost of living which pensioners are experiencing.

Add in the fact that many pensioners were using the interest from their savings as another form of income and this group have a triple whammy to contend with; high inflation, rises to state pensions below the actual rate of inflation they suffer and low interest rates.

Employees With wage inflation running somewhere between 1% – 2% and inflation above 5% many employees will need to make savings somewhere to make ends meet. Others will have to rely on money they have put aside to a rainy day, which is turn is being attacked by the twin threats of high inflation and low interest rates.

Level Annuities When the time comes to buy an Annuity most people compare the income that a level Annuity will give them against one linked to inflation. When people see the reduction in the starting level of income, which can be as much as 50%, they invariably opt for a level Annuity.

Those people with a level Annuity might just be starting to regret that decision today. True, inflation may well fall back to more normal levels over the next couple of years, and the starting level of income is so much higher with a level Annuity, but September’s inflation figures might just be enough to make some people with a level Annuity nervous.

You can see for yourself the difference between a level and inflation linked Annuity by using an online pension Annuity calculator .


Borrowers It is commonly thought that in times of high inflation those people with debts do well, the theory being that inflation effectively reduces the size of the debt in real terms. However, this is only true if wages and incomes are also rising, which is not the case for many people at the moment.

If you are in the enviable position of having your wages rise above inflation then the theory works and your debt is effectively being reduced in real terms. Although the actual balance will of course remain the same and you should never use this as an excuse to stop making payments. In fact, take advantage of the situation and try and repay your debts even faster.

People with inflation linked savings If you were one of the people who took out Index Linked Certificates from National Savings & Investments (NS&I) before they were withdrawn a few weeks ago, you will probably have a smile on your face today.

The return on the Index Linked Certificates is linked to RPI, they also pay an additional fixed amount and the interest is tax free.

You will also be pretty happy if you hold other inflation linked savings accounts, such as those offered by the Post Office.

A word of warning though.

The Bank of England, along with an ever increasing number of economists, believe that inflation will start to fall back towards the 2% target over the “medium” term, there are even some who are predicating zero inflation. If inflation falls so will the rate of interest on inflation linked accounts. Those people with NS&I Index Linked Certificates will be able to move their savings into potentially more lucrative accounts but many other inflation linked accounts do not allow early withdrawals or closure. This could leave a large number of savers stranded in accounts linked to inflation, when there are better deals available elsewhere.

ISA savers and investors

There are currently no cash ISAs which offer an interest rate sufficient to beat inflation, however the silver lining to that particular cloud is that the ISA allowance will rise from April 6th next year to £11,280, up by £600 from the previous year.

This will allow both savers and investors to shelter more of their savings in a tax efficient environment, a crumb of comfort perhaps for those who have seen their savings eroded in recent years by the effects of high inflation and low interest rates.

If you would like to talk about how inflation is affecting you, or consider ways to mitigate its’ affects don’t hesitate to contact our team of Independent Financial Advisers on 0115 933 8433 or by emailing info@investmentsense.co.uk