Savings: How to boost pots in a 'handful of clicks' as savers underestimate inflation risk

Savings, and a range of financial concerns can be impacted by rising inflation and recently, it emerged the cost of living rose to 2.1 percent. However, recent analysis of Bank of England data showed savers are relatively laid back about how inflation affects them, which could prove costly down the line.

The Bank of England released its latest survey on the public’s attitude towards inflation on June 18 and Jason Hollands, the Managing Director of Bestinvest, reflected on the findings.

He said: “The latest Bank of England quarterly survey of public attitudes to inflation is quite an eye opener in revealing low awareness of the rate of inflation but also indicates that directionally the public may be underestimating the risk of rising inflation.

“The survey was conducted in May, at which point disclosed Consumer Price Index inflation was at 1.5 percent, however when asked to give the current rate of inflation, the median respondent thought it was 2.5 percent.

“When asked what their expectations were for the rate of inflation over the coming year, the median respondent stated 2.4 percent, down from 2.7 percent in February 2021.

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“Over this time period, market expectations of inflation have actually risen and in the latest data – for the period to May – inflation actually rose to 2.1 percent which was ahead of market expectations and up sharply from the previous month.

“While the public assumes actual inflation is higher than it is, the survey suggests that directionally many people are too sanguine in their view of whether inflation will rise. This week the UK Consumer Price Index data showed inflation surge to 2.1 percent in May, up from 1.5 percent the previous month. This is the first time it has surpassed the Bank of England’s long-term target rate of two percent in almost two years.

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“Inflation not only puts a squeeze on household budgets through higher costs such as petrol at the pumps, food and clothing, it is also a silent assassin of wealth, which slowly eats away at the future spending power of cash and investments. It is therefore deeply concerning that the Bank of England’s latest data shows the public might actually have become more relaxed about it at the time the trend was sharply upward.

“A whole generation of savers and investors haven’t had to give too much thought to inflation which has been kept largely at bay since the 2008 global financial crisis. However, with the potential for a period of much higher inflation – perhaps in the two to three percent range – those with savings and investments should give careful consideration to the impact of rising inflation. Getting a return that at least keeps pace with inflation, really should be a top priority.

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“Many people hold far too much in cash deposits, earning little in the way of interest given interest rates are at an all-time low. With inflation rising, it is worth considering whether your mix between cash savings and longer-term investments is right.”

Similar sentiments were shared by Sarah Coles, a personal finance analyst at Hargreaves Lansdown.

She warned: “Inflation may be dominating the conversations of those with a real interest in money matters, but most people couldn’t care less. They’re pretty sure it has been between two percent and three percent for a few years and is on the way down at the moment. Two in five are also pretty certain that interest rates are set to rise, but this doesn’t worry them either, because only a small minority think rising rates would be bad for their finances.

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“On the face of it, the Bank of England survey makes it seem as though people are switched onto inflation, because on average we think it’s 2.5 percent – which is fairly close to the current rate of 2.1 percent. However, it’s worth bearing in mind that they came up with the same average in two surveys over the previous six months, when the actual inflation rate was less than 0.5 percent. Most people aren’t bothered about inflation.

“Among those with an interest in finance, talk of rising inflation is everywhere. It has been a hot topic for weeks among people concerned that pouring money into the economy to keep it going will eventually push up prices. Figures showing a rise slightly above expectations this week have fanned the flames. However, most people didn’t notice. In fact, they think inflation is probably on its way down.

“They’re not hugely gripped by the link between inflation and interest rates either, because despite the fact they think inflation will drop, they’re pretty sure that rates are on their way up. And despite the trillions of pounds we’ve borrowed from the banks, they’re looking forward to it, because they’re twice as likely to think a rise would be good for their finances than they are to think it could hurt them.

“This poses serious risks to people’s finances. If they’re savers, losing touch with inflation means they have no idea of how it could be eating away at the value of their cash.

“It helps explain why most people are happy to leave their savings in an easy access account with a high street bank where it’s earning a dismal 0.01 percent. They can’t see the point of switching to a newer bank for 50 times the interest or tying it up for a couple of years in a fixed rate account for more than 110 times the return.

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“Meanwhile, if they think rates are on their way up, they may feel there’s no incentive to make their money work harder, because the rising tide will lift all boats and they’ll earn more where they are without having to switch. This is far from the case. Not only is the Bank of England not predicting significant rate rises in the immediate future, but if they do push up rates slightly over the next couple of years, there’s no guarantee that the high street banks will budge an inch.”

Sarah concluded by breaking down what savers should do to prepare for the value of cash lowering: “We all need to get to grips with our savings, to make sure they’re working as hard as possible for us.

“Once you have three to six months’ worth of essential spending in an easy access savings account, it’s worth considering fixing some of your savings for a period in return for a higher fixed rate. If you’re put off by the thought of the work involved, it’s worth considering a savings platform, where you can switch between accounts of different banks in a handful of clicks.

“However, those people who are in most desperate need of understanding this are also the least likely to be reading about it.

“It means we all have a role to play in talking to our loved ones, getting to grips with how much they understand, and helping them fill in the gaps to protect their finances from whatever the future holds.”



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