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Inflation surge turns the screw on savers

·3-min read
Motorway traffic
Motorway traffic

A “widespread” surge in prices has pushed inflation to a three-year high, hammering savers and intensifying pressure on the Bank of England to consider a rise in interest rates.

The sharpest jump in fuel costs for more than a decade as well as increasing prices for clothes, eating out and hotels pushed the Consumer Prices Index to 2.5pc in June, much higher than that expected by City economists and even further above the Bank’s 2pc target.

Jonathan Athow, deputy national statistician at the Office for National Statistics, said the rise was "widespread" as savers hunted in vain for accounts to protect their money from rising prices.

Analysts at Moneyfacts warned there were no widely available easy-access or fixed-rates savings deals that beat inflation. The closest is a deal from UBL UK that offers 1.66pc interest, but savers would need to lock their money away for five years.

The average one-year fixed-rate deal offers just 0.56pc interest, which would see the real-terms value of a £10,000 lump sum shrink in value by £253. Rachel Springall of Moneyfacts said: “Despite improvements to the top savings rate deals in recent weeks, inflation is raining havoc."

The pressure on prices will fuel the debate over inflation risks as economies reopen and supply shortages of items such as semiconductors come up against a surge in demand. The shortage of chips is thought to be a factor behind soaring second hand car prices.

The Bank of England insists inflation will be "transitory", although its outgoing chief economist Andy Haldane is concerned that the CPI could touch 4pc later this year and higher prices become entrenched.

Inflation is also taking off the US, where shortages of workers and materials have combined with a massive stimulus programme under President Biden. Figures this week showed prices rising at an annual pace of 5.4pc in June, marking the fastest rate since 2008.

James Sproule, chief economist of Handelsbanken, said: “Today’s figures will be of concern to the Bank of England. With the weight of opinion on the Monetary Policy Committee set against early action and with the hawkish Andy Haldane now retired, it is not obvious who might advance the case for early action.”

Threadneedle Street is still pumping extraordinary stimulus into the economy with £450bn in asset purchases announced since last March and interest rates cut to 0.1pc, an all-time low.

Joseph Little, global chief strategist at HSBC Asset Management, said the Bank could be forced to raise interest rates sooner due to the growing inflation threat.

He said: “A more persistent period of above-target inflation remains a risk, for example due to a greater degree of pent-up demand, ongoing supply disruptions, or passthrough from higher input prices as companies rebuild margins.

“This means there is a reasonable chance the Bank of England could push the button on rate hikes in 2022, ahead of other major central banks.”

Paul Dales, chief UK economist at Capital Economics, said the “spike in inflation could be bigger than most expect”. He too warned that the CPI could climb towards 4pc by the end of the year, higher than the 3pc expected by the Bank.

While some price movements have been exaggerated by falls last year, there were also signs of “genuine price inflation” in the figures, he added.

The Bank of England is betting that rising unemployment in the autumn following the end of the furlough scheme as well as the withdrawal of other pandemic support for businesses will cool the economy and eventually ease price pressures.

Yael Selfin, chief economist at KPMG, said: “The prospects of cooling inflationary pressures next year, as firms adjust to new levels of demand, should provide the Bank of England with room to keep interest rates unchanged for a while longer.”