The Daily Telegraph - Saturday - Money
Storm clouds ahead for savers, but the long term forecast is brighter
Inflation is back in the headlines, and we are all going to feel it, but we’re not heading for a replay of the worst post-crisis years when inflation peaked relative to investment returns.
The gloomy years of 2011 and 2012 seem distant now, but they were characterised by price rises that largely hit older households and those on fixed incomes. Savings rates were at that point higher than now, but a succession of policies by the Bank of England was about to bite and drag them down (see graph).
A retired couple, say, living on a fixed annuity income and relying on cash deposits for a top-up couldn’t have been in a worse spot. Official inflation figures were generally lower than the real inflation suffered by these households because much of their spending focused on areas where price rises were acute.
Water, energy and food bills were all shooting up at 6pc a year or more. In mid-2011 official inflation was at 4.2pc but, according to calculation made at the time by Alliance Trust, the investment company, real inflation as experienced by the average householder aged over 65 was well above 5pc. Younger householders who spent more on other elements of the official inflation “basket of goods”, such as electronics, were enjoying a far slower erosion of their spending power. Prices of TVs and smartphones were falling fast.
Now, though, the factors driving inflation are different. The shorter, sharper burst of price rises – the CPI rose to 1.8pc this week, its highest for two years – is due partly to the pound’s weakening in the wake of Brexit but also to the rise in oil prices. (Oil’s plunge of previous years had pushed inflation down, and that trend was going to have to end at some point.)
To the extent that the current rise in inflation is due to the pound’s fall, the effect is expected to be shortlived. And because it is focused on imported goods, older households may experience a lower rate anyway.
But inflation aside, the prospects for savings returns are brightening.
I know I have said this before and the evidence as yet remains scant, but interest rates are going to rise. The dismal lower line of that graph, which shows savings rates dwindling closer to nothing, is going to reverse. Soon.
There is more action with longerterm fixed-rate savings bonds, where rates appear to be rising, albeit not yet by much.
But in the capital markets, the rates at which institutions lend to each other over longer periods are decidedly up. These rates aren’t an exact predictor of household rates, but they offer a clue because they tell us where the market expects rates to go.
In 2011-12 these rates priced threeyear money at about 1.4pc. This fell away to a rock-bottom 0.38pc in autumn last year, from which point it has almost doubled back to 0.7pc. All else being equal, mortgage and savings rates must rise.
Common sense at last on passwords and Pins
For years a silly pretence has existed between the banks and their customers. Banks have issued stern instructions about how we must never write down passwords or Pins. Most of us blithely ignored this stupid, impractical advice and wrote them all down anyway. ( You should never admit to this, however.)
Now at last a senior fraud expert has said openly what we’ve all known from our own experience: modern life requires too many passwords for us to be able to recall without turning to that special page at the back of the diary for a little reminder.
GCHQ’s new cybercrime unit was opened by the Queen this week. Its head, Ciarin Martin, ridiculed security guidelines that he said required us to “memorise the equivalent of a 600-digit number each month”. Well said. So, over to the banks. Find new ways to keep our money safe – without passwords.