The perfect inflation storm is gathering. Andrew Oxlade on how savers are being forced to gamble with their money.
Beleaguered savers have mostly seen their feeble interest wiped out by high inflation in recent years. The Bank of England expects the consumer prices index (CPI (Other OTC: CPIC - news) ) to hold up at around 2.5pc for most of the year before heading below the supposed 2pc target, something it has failed to achieve for three years.
But the best catch-free instant-access account offers only 2pc and the average account pays only 0.86pc, according to Moneyfacts.
Unless savers gamble their money on high-income shares or corporate bond funds, which many experts fear are overpriced, they should expect to see their savings pot shrink this year in real terms.
But the reality could be far worse than the Bank's forecast; a perfect storm is brewing. Central banks are terrified of deflation, so money printing presses have been running at full tilt in Britain and the United States, and Japan has a new leader promising to do whatever it takes.
So now it's a race: every country wants to undermine its currency to increase its appeal to foreign investment. Each one does this by keeping rates low and printing more money. The end result of such policies which are often called "financial repression", because they hand citizens' money to the Government is inflationary pressure.
The well-trailed theory, of course, is that the only realistic option for developed nations to clear their towering debts is to inflate them away: rising prices erode savings pots but they also shrink debts.
Many of the world's shrewdest investors have voiced this concern. Warren Buffett, as usual, was among the first, in 2009. The Sage of Omaha went as far as personally urging world leaders to read Adam Fergusson's 1975 book When Money Dies . It detailed the hyperinflation that impoverished Germany in 1923 after the Weimar government's attempts to print money to pay debts. Similarities with today's response to a debt crisis are unnerving.
Four years after Mr Buffett's warning, the conditions for an inflation storm have gathered and the Cassandras are lining up. Over the past week, PSigma's Bill Mott, a high-profile fund manager, said that with the authorities "creating a smoke screen to allow higher inflation", he estimated a 35pc chance that the "inflation genie" would be released from the bottle. In October he put the chances of a runaway price spiral at a less threatening 25pc.
The prospect of rising inflation is also moving markets, and that has implications for your finances. Demand has been falling for British government bonds, so the yield, which has an inverse relationship with the price, has ticked higher. Because annuities are linked with gilt yields, those looking to exchange their pension pot for an income may see a marginal improvement around the corner.
Meanwhile, a shift in money markets may lead to slightly better fixed-rate savings deals, which would be small comfort given the damage inflicted by the Bank of England's Funding for Lending scheme (FLS) £80bn of cheap loans offered to banks and building societies, making them less inclined to turn to savers. The FLS, incidentally, was also the nail in the coffin last week for the innovative savings website Governor Money (see P4).
Of course, these slight improvements on products are of little use if higher inflation materialises: the buying power of fixed savings and fixed incomes, such as annuities, will be diminished. One way to protect your investing pot is to buy shares in companies that make everyday products but also have the power to increase prices. Mr Mott, for instance, has backed stocks from the tobacco, telecoms, food and utilities sectors.
Financial repression is here to stay. To defend yourself from it, you are forced to take a risk.
>> Read about which stocks Bill Mott is buying at telegraph.co.uk/investing