Money Insider: Price rises leave savers in a fix

Inflation reared its ugly head again this week and is almost back to the peak of 3.5 per cent seen in January this year. Unfortunately for savers, the bad news did not end there, with the latest research from the Moneynet website revealing that the interest rates on fixed-rate bonds have fallen sharply over the past six months.

In October 2009, the Consumer Price Index, now used as the accepted measure of inflation, was running at 1.5 per cent – 1.9 per cent lower than the March 2010 figure reported this week. But while the base rate has remained constant, the same cannot be said for rates across savings accounts.

The new research shows that the one-, four- and five-year best-buy, fixed-rate bonds have been hit hardest, with reductions of 0.75 per cent, 0.65 per cent and 0.65 per cent, respectively, during the past half year. So not only is inflation taking a bigger bite out of savers' spending power, the rates on fixed- savings deals have tumbled by up to 19 per cent.

For example, someone investing £50,000 in a one-year bond with NS&I at 3.95 per cent last October will accrue gross interest of £1,975 over the 12-month term, compared with just £1,600 if you opt for the current 3.2 per cent best-buy from Kent Reliance Building Society today.

The position for longer-term savers is equally bleak. While six months ago you could have got 5.65 per cent from Yorkshire Bank and earned £14,125 before tax with a five-year bond, the best rate on offer today of 5 per cent from State Bank of India will return £1,625 less at £12,500.

The competition for deposits which drove up fixed rates in the second half of last year has all but faded away, and even those plumping for tax-free savings will have been disappointed by the number of Isa rate cuts seen during the past few weeks, as well as the reluctance by institutions offering the best rates to accept transfers in.

It's easy to see why consumers are opting to pay extra off their credit card or mortgage borrowings as the amount of interest saved far outweighs what you can earn on deposit.

The situation for savers has been dire ever since the Government turned to its rate-cutting strategy in October 2008 and there is precious little in any of the manifestos from the three main political parties to indicate that the situation will improve after 6 May.

More bad news for Isa savers

Inflation reared its ugly head again this week and is almost back to the peak of 3.5 per cent witnessed in January this year. Unfortunately for savers, the bad news didn't end there, with the latest research from Moneynet revealing that the interest rates on fixed rate bonds have fallen sharply over the last six months.

In October 2009, the Consumer Price Index, now used as the accepted measure of inflation, was running at 1.5 per cent – 1.9 per cent lower than the March 2010 figure reported this week. But while the base rate has remained constant, the same cannot be said for rates across savings accounts. The new research shows that the one, four and five-year best-buy, fixed-rate bonds have been hit hardest, with reductions of 0.75 per cent, 0.65 per cent and 0.65 per cent, respectively, during the last half year. So not only is inflation taking a bigger bite out of savers' spending power, the rates on fixed-savings deals have tumbled by up to 19 per cent.

For example, someone investing £50,000 in a one-year bond with NS&I at 3.95 per cent last October will accrue gross interest of £1,975 over the 12 -month term, compared with just £1,600 if you opt for the current 3.2 per cent best-buy from Kent Reliance Building Society today.

The position for longer-term savers is equally bleak. While six months ago you could have got 5.65 per cent from Yorkshire Bank and earned £14,125 before tax with a five-year bond, the best rate on offer today, of 5 per cent from State Bank of India, will return £1,625 less at £12,500.

The competition for deposits which drove up fixed rates in the second half of last year has all but faded away, and even those plumping for tax-free savings will have been disappointed by the number of ISA rate cuts seen recently, as well as the reluctance by institutions offering the best rates to accept transfers in.