The picture for the housing market is mixed at the moment, with mortgage rates on the rise sellers have been pricing their properties more realistically. Over the last two years, house price inflation has been spiralling. Rising inflation is also a problem for prospective homebuyers. The difference between RPI vs CPI inflation matters to your finances. Inflation is currently running at 8.7% in the 12 months to April 2023, while you’re fortunate to find a savings account offering more than 4.5% interest.
If the interest rate on them is lower than annual inflation, the amount your savings can buy will still shrink. Say you had £100,000 and stuck in under your mattress, with inflation running at 2% a year on average, after 20 years it would be worth just £66,761.Įven stashing your cash in a savings account currently won’t solve the problem. What effect does inflation have on savings?Įach year, rising prices means you can buy less with what you had. Read more about the relationship between inflation and interest rates, and how that affects you. The central bank has raised interest rates ten times since December 2021 as it continues to try to get a handle on soaring inflation. The Bank of England has a target rate of 2% a year for its preferred consumer prices index (CPI) measure of inflation, but the actual rate changes each month. Over time, compound interest means inflation will eat away at your savings.Ĭompound interest is often great for savers: like a snowball rolling down a hill, you earn interest on your savings, you then earn interest on the interest itself as well as your original savings.īut inflation is the other side of this coin because, in effect, the compound interest can be negative. The CPI rate of inflation was 8.7% in May, unchanged from the month before. If, for example, a bottle of milk cost £1 this time last year, but is £1.05 now, that 5p increase is an inflation rate of 5%. Inflation is calculated as a percentage increase over a given time. Related content: How does inflation affect interest rates? Inflation tracks the rising prices of everyday goods and services How is inflation calculated? How can I make my money beat inflation?.What effect does inflation have on savings?.When making future financial plans, it is essential to consider inflation if you want to ensure that your money stretches far enough. This means that the cost of living is rising by just as much as in the previous month. The consumer price index ( CPI) stood at 8.7% in the year to May 2023, unchanged from April’s level.
It affects everything from the cost of your supermarket shop to how long your pension savings will last.
Inflation is the measure of how much goods and services are going up by over time.
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