Inflation at 7%: Half of Britons don’t know what it means for their savings

More than half of savers don’t know what impact inflation will have on the real value of their cash savings over time, according to research by Legal & General.

Despite inflation continuing to climb to levels not seen since the early 90s – 7 per cent as of March – the research suggests a large number of Britons may be in for a nasty shock.

It found that 13 per cent believe inflation will leave them better off, while a similar proportion believe the real value of their savings would stay the same.

It also found that more than a quarter of Britons simply don’t know what impact inflation could have on their cash.

Emma Byron, managing director at Legal & General Retirement Solutions said: ‘Inflation is at its highest rate for three decades and it’s worrying that savers don’t realise it’s eating away at millions of pounds sitting in low-interest paying accounts.

‘Understanding the impact of inflation is crucial to understand how much money you have in real terms.

‘Whilst it is essential to keep some cash in the bank for an emergency fund, savers might want to consider other options to make their money work harder.’

What is inflation?

Inflation is the rate at which prices rise. For example, if the average pint of milk rises from 60p to 66p over 12 months, then milk inflation is 10 per cent.

In truth, there’s no such thing as a single rate of inflation. Everyone will have their own because people buy different goods and services from an array of shops and sellers.

The changing price of dog food, for example, is not going to be relevant to someone who does not have a four-legged companion.

Instead, Britain’s national statisticians aim to create a representative basket of goods which is broadly reflective of the nation’s shopping habits.

The consumer price inflation index measures the average change in prices of more than 700 things that people regularly spend money on.

This ranges from everyday things such as loaf of bread and a bus ticket to larger purchases such as a car or holiday.

These 700 things form part of a basket of goods and services that is monitored over time and gives us the average change in prices, which is recorded monthly as CPI. 

For those who would like to see how how average prices have changed and what money used to be worth, try our historic inflation calculator.

What impact is it having on your savings?

Almost two thirds of savers have taken no action on their savings despite cash earning next to nothing in interest and inflation rising steeply, L&S says.

More than three in five savers keep cash in an easy-access savings account, according to Paragon Bank’s analysis. Of this, a staggering 81 per cent earns 0.1 per cent or less.

It means that roughly half of all British savers have their cash vegetating in accounts earning 0.1 per cent or less.

For someone stashing away £10,000 in an account paying next to nothing, they will see the purchasing power of their cash disintegrate if inflation continues at current levels.

For example, if prices rise by 7 per cent annually for the next five years, then the value of £10,000 will have the equivalent purchasing power of £7,220 in five years. In 11 years the real value of that £10,000 would have halved.

Even looking back, savers will see the brutal impact of inflation on their savings over the past year alone.

£10,000 stashed away in an account paying next to nothing in March last year would be worth the equivalent of £9,300 in purchasing power if you tried to spend it in March this year.

But inflation won’t just erode people’s existing savings balances, it will negate people’s ability to keep up their habit of saving.

Household saving soared during the pandemic and peaked in the first three months of last year with the average household saving recorded at £152 a week, according to research by Scottish Friendly and the Centre for Economics and Business Research.

However, since then, saving levels have continued to fall. Household savings is forecasted to fall to a weekly average of £26 over the coming months.

To offset the impact of inflation, households would have to earn an extra £80 a week  or spend £66 a week less to be able to save at the same level as this time last year.

Kevin Brown, savings specialist at Scottish Friendly, said: ‘Household savings are set to fall well below pre-pandemic levels in the second quarter of this year as Britons take-home pay drops and their outgoings rise.   

‘As a result, households’ ability to save and invest is going to be severely reduced in the short-term. 

‘Not only are people going to be able to put away less money, but they may also have to rely on existing savings to maintain their normal standard of living.

‘We would encourage everyone to carry on saving and investing where possible, even a small amount each month, but we recognise that for some people on lower incomes that may not be possible.’

What should savers do?

In the face of such financial erosion it’s easy for savers to give up caring how much their savings account is paying them. 

After all not a single savings product gets anywhere close to keeping up with inflation.

However, getting the best interest rate on your savings can at least limit the damage.

For those who may need the cash in the short-term, perhaps to help cover rising bills like energy, mortgage, travel and food costs, the best paying easy access deals now pay more than 1 per cent.

Zopa bank is paying 1.15 per cent on balances up to £15,000 on its easy access deal, whilst Tandem Bank and Cynergy Bank are both currently paying 1.1 per cent.

For those who can afford to stash their savings away for the long term, they should think about topping up their pension, or investing in a stocks and shares Isa. 

Sarah Coles, personal finance analyst at Hargreaves Lansdown said: ‘For money you don’t need for 5-10 years or more, you can consider stock market investments. 

‘The value of your investments will rise and fall in the short term, but over longer periods you should be able to ride this out and your investments stand a much better chance of beating inflation than they would in savings accounts.’