Inflation warning: Bad news for savers as inflation rises to 4%

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Budget 2021:Chancellor Rishi Sunak Inflation likely to rise further

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Chancellor Rishi Sunak unveiled the inflation increase forecast during his Autumn Budget announcement this afternoon. This represents a sharp increase from the OBR’s last forecast of 3.1 percent in September earlier this year. In March 2021, inflation was predicted to hit 1.8 percent in 2022, with the Chancellor warning that the supply chain and energy bill crisis will take “months” to reach an end.

As part of his Budget announcement, Mr Sunak outlined his plan to create two new fiscal rules for spending measures going forward.

According to the Chancellor, these new fiscal rules will “keep this Government on the path of discipline and responsibility”.

During his Budget announcement, Mr Sunak explained that “demand for goods has increased more quickly than supply chains can meet” as other countries’ economies reopen at the same time as the global demand for energy has risen.

Mr Sunak said: “In the year to September, the global wholesale price of oil, coal and gas combined, has more than doubled. The pressures caused by supply chains and energy prices will take months to ease.

“It would be irresponsible for anyone to pretend that we can solve this overnight. I am in regular communication with finance ministers around the world and it’s clear these are shared global problems, neither unique to the UK, nor possible for us to address on our own.”

Reacting to the inflation rate on social media, the former pensions minister Steve Webb tweeted: “If inflation is going to ‘average’ four percent over the next year, then presumably it is going to peak at a higher figure?”

“It would be irresponsible for anyone to pretend that we can solve this overnight. I am in regular communication with finance ministers around the world and it’s clear these are shared global problems, neither unique to the UK, nor possible for us to address on our own.”

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On Twitter, Paul Johnson, the director of the Institute for Fiscal Studies (IFS), said: “OBR assumes only two percent long term effect of Covid on the economy, compared with three percent in March. This will give the Chancellor serious room for manoeuvre.

“Don’t forget the 2008/09 crisis hit the economy by 10 percent permanently. If we get away with two percent, we should be relieved.”

The Chancellor’s new fiscal rules to boost the UK economy include prioritising a consistent drop in underlying debt.

As well as the OBR’s latest inflation estimates, Mr Sunak revealed that underlying debt is forecast to be 85.2 percent of GDP for 2021.

By 2022-23, this debt figure is set to reach 85.4 percent, before rising once again to 85.7 percent by 2023-24.

Furthermore, the Chancellor’s new rules also include balancing “day to day” spending budgets by the third year of forecasts.

The Chancellor also promised to meet its various commitments to improving investment and public services, while keeping investment in mind.

He added: “In terms of our fiscal policy, we are going to meet our commitments on public services and capital investment but we are going to do so, keeping in mind the need to control inflation.

“I understand people are concerned about global inflation but they have a government here at home ready and willing to act.”

However, experts are warning Mr Sunak that the recent rise in inflation could result in the Government’s debt costs increasing also.

According to the Government’s own estimates, even a one percent jump in inflation and interest rates would result in taxpayers handing over £23billion a year.

This extortionate cost would be the equivalent to around double the tax revenue the Government hopes to raise in National Insurance contributions for its health and social care plans.

The Bank of England is set to announce its November policy decision next week, with the institution’s Chief Executive having predicted a five percent rise in the inflation rate by early next year.

The Government also faces further backlash from the pension age population as those in this particular age demographic are found to be more likely to be concerned about rising inflation and low interest rates.

A recent survey by insurer LV= revealed that 2.3 million Britons over the age of 65 are worried that their savings are being “eroded” by soaring inflation.

Clive Bolton, Managing Director of Savings and Retirement at LV=, explained the concerns of many pensioners regarding the state of the country’s inflation.

Mr Bolton said: “Rising prices and poor returns on deposit accounts will dismay pensioners whose only or main source of retirement income is the state pension.

“Many will be financially squeezed as the cost of essential items like home heating rise while returns from savings accounts – which typically form the bulk of retired people’s savings – remain low.

“Rising inflation and poor returns from cash present a dilemma for people in retirement.

“They might have to drawdown their savings more quickly than they would want or switch some of their savings into higher-risk assets.

“These can offer the prospect of keeping pace with inflation but can be hit hard if investment markets fall.”

Addressing this concern of pensioners, Becky O’Connor, Head of Pensions and Savings, elaborated on the dangers posed by an inflation rise, specifically when it comes to interest rates.

Ms O’Connor said: “The Chancellor’s inflation forecast of four percent will spook everyone already worried about rising living costs.

“It will be especially scary for pensioners trying to cover essentials from their limited income and anyone trying to make their pension pot last in retirement.

“Price rises also negatively affect workers investing for retirement and trying to achieve returns that beat inflation to ensure they eventually have enough in their pension pot.

“Inflation at a level of four percent becomes hard to beat even when investing in the stock market, so long term investors will have to be clever to beat it.

“The additional prospect of an imminent rise in interest rates, hinted at by the Chancellor as he referenced the Bank of England’s duty to control inflation, will be scant comfort, as savings rates remain so far behind inflation that any rise would make little difference to the appeal of keeping money in cash savings.

“Best buy easy access accounts currently pay around 0.65 percent. It would take 14 quarter point base rate rises for this to beat four percent inflation.”

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