The cost of living crisis has taken a toll on savers across the UK. With the rapid growth of household bills and everyday essentials, expenditure has taken priority in people’s financial plans, causing long-term savings to take a back seat for many.
The fight to bring inflation under control has been a central focus over the past two years. The Bank of England's repeated high interest rate policy to avoid unwarranted spikes in inflation reiterates this.
Yet, despite inflation returning to normal levels, having dropped from 2.3 per cent to the target rate of 2 per cent in the 12 months leading up to April and May, respectively, the general mood remains subdued.
The journey to this point has been arduous, with inflation proving stubbornly persistent.
While a gradual easing during the first half of 2024 suggests an improving economy, the residual effects of years of high inflation will likely linger for some time.
The cost of living crisis continues to impact household finances. Significant shifts in overall pricing, as well as in the relative costs of food and energy, mean that many are still struggling to cover expenses.
A recent poll by the Trade Union Congress revealed that 58 per cent of people think their living standards either stayed the same or got worse, with only 14 per cent saying they had improved.
Until we achieve a period of economic stability that benefits each of us as individuals, not just the markets, it is crucial to consider how we can address the impacts of inflation within our financial planning strategies.
Combating high prices with better savings returns
The significant impact of this nearly three-year period of high inflation has transformed the economy and public finances, altering consumer spending and saving behaviours.
Data from the Resolution Foundation indicates that since the fourth quarter of 2019, just before the coronavirus pandemic, real household disposable income per person has decreased by 1.1 per cent, or £280 annually.
More strikingly, real consumption per person has declined by 4.7 per cent, or £1,200 annually.
In the final quarter of 2023, households saved 6 per cent of their disposable incomes, marking the highest savings rate outside the pandemic in more than 30 years, according to researchers.
The BoE's cautious approach to inflation has created a beneficial scenario for savers: the high interest, lower inflation climate offers an opportunity to recoup some losses.
The increases in interest rates and the gradual decline of inflation we have seen over recent months have provided consumers with the potential for much better returns on their savings.
However, this situation also highlights a significant issue in personal finance: the gap between the base rate and the interest rates offered by some high street banks.
Numerous inflation-beating savings opportunities exist, with hundreds of deals currently outstripping inflation.
However, consumers must be proactive to benefit from a well-thought-out and agile savings plan.
Many are missing out on the best savings deals simply because they are reluctant to leave traditional high street banks for competitors offering better rates.
