Inflation stalls at 2.8%
Savers continue to despair as the Consumer Prices Index remains stubbornly above the government's 2% target for inflation. A basic-rate taxpayer now needs a savings account paying at least 3.5% interest to make any real return, and a higher-rate taxpayer will need to find a minimum of 4.66%, according to Moneyfacts. However, the average easy access account now pays a measly 0.77%.
Samuel Tombs, UK economist at Capital Economics, says inflation is likely to increase. He expects it to reach a peak of about 3.5% over the next few months before it falls back. "There are still reasons to think that the intense squeeze on households' real earnings will begin to ease later this year," he says, adding that a fall in oil prices has brightened the outlook.
According to Investec, the upward pressure on inflation came from "recreation and culture", where prices rose by 0.5% between February and March. This was offset by lower prices for petrol. The likes of water bill price hikes are likely to push the inflation figure up further in April.
Adrian Cammidge, head of investment communications at Kames Capital, points out that although inflation is high it is at least predictable, which is a "marked contrast to the environment of last year".
He says sterling's weakness has been a main contributor to the sustained period of higher inflation and adds that although commodity price falls have led to hopes of a fall in inflation, "the pass through to UK inflation data over the coming months will be gradual and offset to some extent by the devaluation of sterling since the beginning of the year".
Prudential says pensioners remain particularly affected by high inflation. Vince Smith-Hughes, retirement expert at the firm, says coupled with retirement incomes hitting a six-year low, pensioners' budgets remain "incredibly strained".
This article was written for our sister website Money Observer
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).