How the stock market can help your cash beat inflation
THE rising cost of motor fuels and food prices have helped to push UK inflation to its highest rate for more than two years, with the Consumer Prices Index (CPI) rising to 1.8 per cent in January, up from 1.6 per cent in December, according to the Office for National Statistics.
The data highlighted that motor fuel prices had risen by 3.4 per cent between December and January, in contrast to a 2.6 per cent fall a year earlier.
Food prices, meanwhile, were flat between December and January, having fallen by 0.6 per cent a year earlier.
The EY Item Club thinktank highlighted its expectation that annual CPI inflation would climb towards three per cent in the second half of this year, as the impact of sterling’s weakness in the wake of the Brexit vote passes along the supply chain to consumers.
Annual CPI inflation in January was not quite as high as the 1.9 per cent forecast by economists, but it is up sharply from 0.3 per cent in May last year.
The EY Item Club observed heavy discounting in clothing stores was the main reason inflation had not come in higher than it did in January.
While cheaper clothes may have brought some relief for consumers, Howard Archer, chief UK economist at IHS Markit, said the “marked pace at which consumer price inflation is rising” means consumer purchasing power “is now starting to be seriously squeezed”.
The knock-on effect for savers is that, with interest rates remaining at historically low levels, the value of their savings is now being eroded.
Anna Bowes, director of independent savings advice site SavingsChampion, said: “The continued rise in inflation is a further blow to beleaguered savers and therefore it’s even more important than ever for them to switch to the best rates to at least mitigate the eroding effects.”
The average easy access rate is now a paltry 0.37 per cent and there were more than 2,000 rate cuts last year, with more in the pipeline.
NS&I, for example, is to chop the rates on a range of variable savings accounts from May 1, with the rate on its Direct Saver set to fall from 0.8 per cent to 0.7 per cent. Savers with income bonds will suffer a cut of a quarter of a percentage point from one per cent to 0.75 per cent while the prize fund rate on premium bonds will also fall, from 1.25 per cent to 1.15 per cent.
Danny Cox, chartered financial planner at Hargreaves Lansdown, the financial adviser, said: “This cut in interest rates is another devastating blow for millions of savers. Ironically, with so little interest on cash for savers, premium bonds look more attractive – if your savings are basically returning nothing, you might as well opt for the chance of the jackpot prize.”
Mr Cox added that high inflation and low interest rates could even tempt some people out of cash and into the stock market.
“Lower interest rates and rising inflation will test savers’ patience and I expect more people to look to the stock markets for some of their cash to improve their long-term returns,” he said.
The figures are certainly appealing. Tom Stevenson, investment director for personal investing at Fidelity International, said: “For anyone who is unsure about the benefits of investing in the stock market over stashing cash under the mattress, our calculations show if you had invested £15,000 into the FTSE All Share Index 20 years ago, you would now be left with £52,965.
“If, however, you had invested £15,000 into the average UK savings account over the same period, you would be left with a paltry £19,916. That’s a difference of £33,049 – too big for any investor to ignore.”
But the stock market is risky – and there are no guarantees. Experts therefore advise savers to keep some money in cash in case of any emergencies and seek appropriate advice before dabbling in shares.
Mr Cox said: “Equity income funds are a good starting point because they are at the lower end of the stock market risk scale. They invest in companies with good records of making profits and distributing these in the form of dividends.
“Investors who reinvest these dividends gain a powerful boost to their capital.”
‘‘ It’s more important than ever for savers to switch to the best rates to at least mitigate the eroding effects