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.

Weak sterling

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

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