Inflation and VAT concerns make life worse for savers

News that the UK consumer price index rate of inflation made a surprise jump to 3.7 per cent last month will add to the discomfort of the nation's savers.

The CPI inflation rate climbed from the 3.4 per cent recorded in March.

The rise was fuelled by hikes in the price of clothing and food, and by the return of VAT to its old rate of 17.5 per cent.

The retail price index, which includes mortgage costs and is the gauge most often used by employers for wage settlements, also leaped to 5.3 per cent from the 4.4 per cent of March.

Inflation has now been on an upward curve for eight consecutive months, although the Bank of England has been forecasting a fall later in the year.

The effect is likely further to erode the real value of savings funds, hitting those in particular who depend on interest returns to boost their incomes.

With the official Bank rate still sat at 0.5 per cent, many deposit accounts are offering meagre returns.

At the current rate of inflation, and once taxes have been factored in, a basic rate taxpayer will need an account delivering 4.625 per cent to outstrip the rise in prices, while a higher rate taxpayer will require a 6.17 per cent interest rate.

For basic rate taxpayers, there are just 20 accounts available that enable them to retain the value of their money; for higher rate taxpayers that figure comes down to just one, according to the financial website, Moneyfacts.co.uk.

Darren Cook of Moneyfacts said: "Rises in the rate of inflation continue to antagonise savers who are already struggling to achieve a competitive rate of return on their money.

"The qualifying restrictions on those products that do beat tax and inflation are likely to be suitable for only a small proportion of savers. A spiralling inflation rate, which could be aggravated by the predicted rise in VAT can only point towards a bank base rate increase sooner rather than later."

Andrew Hagger of Moneynet, another financial website, warned that any rise in VAT could make matters worse: "In recent months more and more people are looking to savings products, but they have been hit by the double whammy of low rates and high inflation. If VAT goes up to 20 per cent they will be hit even harder."