The uncertainty of the current economic landscape has been one of the main drivers keeping inflation at a 3-year low of 1.70%. The prevailing rate, which falls short of the Government target of 2%, has remained low due to falling fuel costs and a slowdown in the price of second-hand cars.
What is inflation?
Inflation decreases the value of money over time as goods become more expensive. For example, in 1990 a pint of milk cost on average just 25p, whereas now you can expect to pay around 50p for a pint.
While inflation is continually pushing prices up, lower inflation can increase consumer purchasing power as the cost of goods remains steady or increases at a slower rate.
Similarly, as inflation falls, the potential for savers to generate more interest income in real terms should increase.
However, Brexit uncertainty, coupled with lower inflation and a weakened economy, have increased the expectation that the Bank of England could cut the base rate. Indeed, in yesterday’s meeting of the Bank of England’s Monetary Policy Committee (MPC), two of its members voted for a reduction in the base rate, suggesting a potential reduction from its current level of 0.75% in the coming months and resultant pressure on interest rates.
How inflation affects your savings
It’s important that savers and investors understand the inflation rate and the impact it has on their money in real terms.
For example, if you deposit £1,000 in a savings account paying 1.50%, that will grow to £1,015 after 12 months. However, if inflation is at 2% your money has lost value in real terms and is worth less than the £1,000 you initially deposited, despite the perceived growth.
If your savings rate matches the current rate of inflation, you can keep pace with rising living costs and maintain the value of your money in terms of purchasing power.
However, savers and investors are looking to grow their money rather than maintain its value. To do this, you need to place your money in an account that is paying more than 1.70% - the current rate of inflation. The amount of interest you earn above the rate of 1.70% is your profit in real terms.
Notice account rates are on the rise
The clouded economic outlook means there are now fewer inflation-beating accounts currently available to savers. Despite the savings slump, notice account rates have remained buoyant and are on the rise.
By shopping around for the best interest rates, savers can minimise the impact of inflation, but as ever the challenge for consumers is identifying and opening new accounts paying better returns in a timely and efficient way.
Beat inflation with Flagstone
Flagstone, an online cash platform, allows savers to compare and access the best-in-market rates with ease. On completion of a single application, account holders can deposit cash across 38 banks and building societies, choosing from more than 550 deposit rates.
Importantly, the lower inflation rate means that more Flagstone accounts are now beating the prevailing rate of 1.70%. There are currently 85 different deposit rates available on the platform that exceed the rate of inflation and are therefore delivering returns in real terms1.
Account holders looking to lock their money in for a longer fixed term can take advantage of higher interest rates including:
- 1.95% AER/Gross for one-year fixed term deposits1
- 2.25% AER/Gross for three-year fixed term deposits1
- 2.50% AER/Gross for five-year fixed term deposits1
Although the economic climate remains uncertain, now is the time that savers can take control of their finances and the opportunity to earn more interest. By depositing cash through the Flagstone platform, savers can secure market-leading rates and circumvent the potentially adverse impact of Brexit on their savings.
To learn more about how Flagstone works, watch this short video and to open an account click here.
1 Correct as at 5th November 2019