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Inflation data: Any gain for savers ‘may be very short-lived’

by LLB Finance Reporter
16th Aug 23 10:19 am

The Consumer Prices Index rose by 6.8% in the year to July, the Office for National Statistics reports, down from 7.9% in June, meeting City economists’ expectations.

That’s the lowest inflation rate since February 2022, and further from the peak of 11.1% set last October.

But it still leaves inflation well over the Bank of England’s target of 2%.

The Chancellor Jeremy Hunt has said inflation slowing is a sign that “the decisive action we’ve taken to tackle inflation is working,” however “we’re not at the finish line.”

“We must stick to our plan to halve inflation this year and get it back to the 2% target as soon as possible,” he added.

The Prime Minister said at the beginning of the year that he wants to cut inflation in half and economist have said in their recent forecast that Rishi Sunak may well achieve this.

This comes as the Bank of England are predicting inflation will be from October around 4.9%.

ONS deputy director of prices Matthew Corder said: “Inflation slowed markedly for the second consecutive month, driven by falls in the price of gas and electricity as the reduction in the energy price cap came into effect.

“Although remaining high, food price inflation has also eased again, particularly for milk, bread and cereal.

“Core inflation was unchanged in July, with the falling cost of goods offset by higher service prices.”

For savers this is great news as it will lead to improved real returns for savers and investors, but any gains could be short lived.

Scott Gallacher, chartered financial planner at Leicestershire-based independent financial advisers, Rowley Turton: “Lower inflation is great news for savers as it leads to slightly improved real returns for savers and investors.

“However, given that banks have already cut mortgage rates in anticipation of these inflation figures, I expect savings rates to follow suit. As a result, any gain for savers may be very short-lived. And for those just about to retire and looking to purchase an annuity, lower interest rates could be very bad news.”

Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial: “A lower than expected CPI print is good news for most of the economy as the cost of living slows. However, this means the Bank of England is more likely to keep interest rates on hold at the next meeting.

“UK savings rates are more closely linked to the Bank base rate than other financial products like personal loans or mortgages. This means that, although borrowing rates might be high, saving rates may have peaked for the time being. If you have a pension or stocks and shares, this will be good news.

“It might signal a pivot in rate policy and I expect the FTSE to pop today. This could mean companies get more confident about the future and choose to start borrowing to invest again. This creates a better outlook for stocks and, generally, increases their price.

“If you can get a risk-free rate of 6%, with some savings accounts, it’s unlikely many people will pile into shares. A shift in rate policy could change this.”

John Choong, equity and markets analyst at investing comparison platform, InvestingReviews.co.uk: “Today’s headline CPI data is certainly encouraging news, but given that the core print remains hot, the Bank of England is still likely to raise the base rate at its next meeting.

“This could mean higher rates for savers on their savings. However, those invested in the stock market, especially the FTSE 100, may continue to see negative real returns in the short term considering the index’s flat performance so far in 2023. Britain’s leading index is down circa 1.8% over the past 12 months while inflation remains hot at 6.8%.

“As such, the inflation outlook will need to continue improving, especially on the core front, before investor sentiment rebounds. Until then, expect the stock market to remain fairly muted as a strong pound continues to act as a headwind to earnings given that the bulk of the FTSE 100’s profits come from abroad.

“Thus, those seeking a ‘safer’ and higher-return alternative in the short term may be better off considering high-yielding government bonds and/or other ‘risk-free’ products.”

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