No rate relief for savers amid warnings RPI could hit 10%

Market commentators and economists, such as Robert Wood, UK economist for Bank of America Merrill Lynch (MLI UK) have described the latest inflation data as being akin to Everest Base Camp IV - "It's a long way up but there is more to come".

As reported by FTAdviser, the latest data showed a 5.5 per cent increase in the CPI for January 2022, and 7.8 per cent increase in the RPI.

However, James Lynch, fixed income manager at Aegon Asset Management, warned the UK could see 7.4 per cent CPI and maybe even a 10 per cent RPI as we head into April.

March was always a done deal for a rate increase.Lynch

He said: “2022 seems to have been billed as the year of a cost-of-living crisis, and it starts with another inflation print that once again is higher than expected at 5.5 per cent CPI for January 2022 and a whopping 7.8 per cent on the old RPI measure."

Analysis from Canada Life has stated this change in inflation leaves UK households collectively needing to find an extra £42.7bn a year to maintain their standard of living compared to 12 months ago.

This means the average household in Britain will typically need to spend an extra £1,537 a year to maintain their standard of living compared to a year ago.

Lynch added that while all bets were off in relation to an upward base rate move in March, there now is a question of how much the Bank of England will have to raise interest rates to get anywhere near its target 2 per cent inflation.

He said: "In terms of a BoE interest rate move, March was always a done deal for a rate increase even before this number. The question now is how much the BoE want to raise interest rates and how quickly.”

Yet even though rate rises have typically been good for cash savers, Rachel Springall, finance expert at Moneyfacts, said the reality has been somewhat different. 

“Savers have been dealt another blow this month as inflation rises once more and is unbeatable with any standard savings account.

"Despite a slight uplift to some of the top savings rates since last month’s inflation announcement, rising inflation is not allowing any respite. While the Bank of England predicts such a level to be temporary, even the government target of 2 per cent cannot be beaten unless savers lock into a five-year fixed bond.

"There are still savers out there waiting for the December 2021 base rate rise to be passed onto them, let alone the most recent uplift of 0.25 per cent a couple of weeks ago."

Pension pain

But the worst-hit will continue to be pensioners, according to calculations from Quilter. The analysis suggests pensioners will suffer the worst disparity in their state pension payments when compared to the inflation rate since the triple lock was brought in over 10 years ago.

It was announced in November that the state pension was to increase by 3.1 per cent, which was set using September’s CPI.

However, with inflation running at 5.5 per cent in the 12 months to January that means that pensioners will currently see a real term loss of 2.4 per cent in the amount of income they will receive from the government, and it could get worse as the BoE expects CPI inflation to peak around 7.25 per cent in April.

Many people rely on fixed incomes including retirees.Andrew Tully

The increase in state pension in 2023 will be based on CPI in September 2022 which will take account of inflation at that point. Therefore in 2023, the state pension increase could be higher than inflation for that year.

But pensioners - many of whom have high cash savings being eroded by inflation - are likely to be worst-hit when it comes to the cost of the average basket of goods and services bought by older consumers.

They will also suffer most from higher utility bills and the new new national insurance tax. Therefore, specialists have warned advisers with older clients to take action to review their savings plans - and fast. 

Andrew Tully, technical director at Canada Life, said: "Many people rely on fixed incomes including retirees who typically live off pension income and can be disproportionately affected.

"Building some form of protection against the ravages of inflation can help people maintain living standards by combining drawdown and annuities as part of a retirement plan."

simoney.kyriakou@ft.com