Respite for consumers and savers as inflation falls

There was some good news for consumers ahead of the Christmas season as inflation fell to its lowest rate for more than a year.

The consumer price index (CPI) measure of inflation fell to 2.2% in October, from 2.7% in September. The retail price index measure of inflation fell to 2.6%, from 3.2% the previous month.

The Office of National Statistics said the fall was due to falling transport costs, which registered their biggest drop in over four years.

The cost of petrol has fallen owing to fierce competition between supermarkets, while airfares have also fallen.

Ryanair boss Michael O’Leary recently said that the airline’s winter prices were ‘weaker’, which would keep profits subdued.

The annual price rise in the cost of education also fell, as the impact of tuition fee rises was reduced.

And food inflation, though still troublingly high, fell by half a percent in October, from 4.8% to 4.3%.

Better News for Savers?

On the surface, the fall is good news for savers, who can now achieve returns much closer to inflation through the best easy-access ISAs (1.80%) and even surpass inflation through fixed-rate accounts.

A 3 year fixed-rate E-ISA through Virgin Money will return 2.40% (inbound transfers accepted), while a 5 year fix will return 3.00%.

For taxable accounts, savers who are taxed at the standard rate now require an account returning 2.64% to match inflation.

Savers will have to fix for at least 3 years to achieve this. A 3 year fixed-rate bond with Shawbrook Bank returns 2.65% for those investing over £5,000, while Vanquis Bank follows closely behind at 2.56% on bonds worth at least £1,000.

It is also difficult to overlook the interest-paying current accounts offered by Nationwide and Santander, which surpass most savings accounts without restricting access to funds.

The inflation respite is likely to be temporary, however, as the latest round of price increases from energy companies – some as high as 10% – come into effect across November and December.

Lower inflation also acts as a false dawn for savers, as it reduces the pressure on the Bank of England to raise interest rates, postponing the more natural recovery of savings rates in the longer term.

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