Blow to savers as inflation rises and stock market rally peters out

Double whammy to cash pots as cost of living and bond yields both rise.

Savers have been hit with a double whammy of rising inflation and increasing bond yields.

Two sets of financial statistics released today make worrying reading for savers and investors.

UK inflation rose from 0.6% to 0.7% during January, according to the Office for National Statistics (ONS), with the cost of living pushed up by prices of furniture and household equipment.

Britons have been focused on spending their spare cash on improving their living space amid restrictions on holidays and other consumer spending during the pandemic.

Spending on items such as travel remains subdued. But once lockdown rules ease and the vaccine roll-out gathers pace, a return to spending is expected to push inflation up even further.

The ONS is expecting inflation to hit 2.1% by the first quarter of 2022. This would be bad news for savers.

Financial experts Moneyfacts say there are now just 100 savings accounts that beat inflation and none would currently outperform a rate of 2.1%.

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Rachel Springall, finance expert at Moneyfacts, says: “The eroding power of inflation on cash savings is getting worse – not only has the number of savings accounts that can beat inflation fallen, but some top deals have also been cut over the past month.

“Those savers who are hoping to earn a decent return on their cash will be disappointed by the current state of the market, but they should not be discouraged to switch if they are on a poor rate.

“Inflation is predicted to climb to 2.1% during the first quarter of 2022, and right now not one standard savings account could beat this, nor the government’s target of 2%.”

Investors enjoyed a stock-market rally in recent weeks. Vaccine roll-outs and falling coronavirus cases injected new confidence into global economies with the prospect of a return to normality.

But as economies recover and spending returns, analysts fear that inflation will rise and the stock market boost will flatten out.

Government bond yields are already rising, reflecting a flight to safety as investors fear rising bills and household costs will dampen consumer spending.

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UK 10-year government bond yields are at 0.61%, which is the highest since the start of the pandemic last March.

Meanwhile, the yield on 10-year US Treasuries has hit a new one-year high of 1.3% amid positive economic data and US president Joe Biden’s new economic stimulus package.

Neil Wilson, analyst for Markets.com, warns that inflation risks becoming “unanchored” as it is buoyed by loose monetary policy and pent-up spending demand.

He says: “It’s not the absolute yield that matters but the rate of change which is catching investors off guard.