Savers face fresh turmoil after months of rock-bottom interest rates after the Government's official measure of inflation jumped to 2.9 per cent last month.
Experts have warned that the consumer price index (CPI) is set to rocket past 3 per cent this month, significantly eroding savings in real terms. A jump in inflation, which measures the rising cost of goods and services, effectively reduces the value of cash sitting in savings accounts.
The sudden jump to a nine-month high of 2.9 per cent in December, from 1.9 per cent in November, has been attributed to the cut in VAT to 15 per cent at the start of 2009, which returned to 17.5 per cent at the beginning of this month. Less discounting by retailers at Christmas compared to the previous year has also been blamed.
A basic-rate taxpayer needs to earn at least 3.63 per cent in a savings account to stop their nest egg being eroded in real terms by the current rate of inflation. A higher rate taxpayer needs an account that pays 4.81 per cent.
Not a single easy access savings accounts available in the market today pays enough to cancel out the effect of tax and inflation, according to moneysupermarket.com, the price comparison website. The best paying easy access account is the Coventry Building Society First Class Postal account paying 3.3 per cent. There are 14 regular savings accounts which pay an interest rate higher than 3.63 per cent.
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Darren Cook, of Moneyfacts.co.uk, another comparison website, said: “Inflation is starting to make its unwelcome mark on people’s spending power and with savings interest rates stuck at their historical low, there is little that savers can do to fight back.
“Pensioners who may rely on their savings pot to subsidise their pension are seeing their savings being eroded on average by 2.30 per cent per year for a basic rate taxpayer and 2.45 per cent for a higher rate taxpayer.
“This is extremely unfair for those savers who have made prudent or astute decisions in the past and are being hit by low savings rates and spiralling inflation."
Since the Bank of England cut the base interest rate to 0.5 per cent in March last year, savers have seen the returns offered by banks plummet. The average no-notice interest rate for new customers is 0.75 per cent, not far above bank base rate.
However, while banks and building societies continue to compete for new deposits with higher advertised rates, existing savers have seen their returns shrink to near zero. Experts say that anyone with a savings account that is more than 12 months old is likely to be suffering from dismal returns.
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Kevin Mountford, of moneysupermarket.com, said: "The inflation announcement is a real blow to savers who are finding it extremely hard to find a suitable place for their hard earned cash.
"When looking to choose a suitable savings product it is easy to forget the impact inflation can have, so it’s vital savers keep a close eye on how their account stacks up. Inflation was dwindling for much of last year but today’s numbers show it’s very much back on the agenda and savers really have to be proactive to find the right deal."
There are also fears a steep rise in inflation will prompt the Bank of England to raise interest rates over the coming months from the current rate of 0.5 per cent.