It's savers who suffer
The Bank of England still shows no sign of raising interest rates, despite dreadful inflation figures. Price rises seem relentless, with essentials such as food increasing by over six per cent, electricity by over 10 per cent and gas going up nearly 20 per cent.
Meanwhile, bank accounts pay under two per cent interest and even the best five-year savings accounts pay only five per cent, so savers' purchasing power is being whittled away. Inflation expectations are rising, but official interest rates are not. Mainstream economists say increasing interest rates will damage the economy. This is only true up to a point. Not raising rates could actually be more harmful than a small rise to restore consumer confidence.
UK economic weakness is partly due to rising inflation and falling real incomes, which have undermined consumer confidence, so even people who could afford to spend are cutting back in fear of future inflation. Many of us remember the dreadful 1970s and 1980s 'stagflation', with soaring prices and weak growth. The Bank of England's failure to fight inflation rekindles fears of such problems. A small rate rise could help consumer confidence - and encourage more spending. Sadly, there is no sign of this.
The Bank is focussing on weak economic numbers and on helping the borrowers and banks who benefit hugely from such low rates. Tracker mortgages cost next to nothing and average two-year mortgage rates are just 4.3 per cent. Borrowers do brilliantly, while savers suffer.
So, how can we safeguard our savings against inflation? This is tricky but the Government at least offers some help. It recently reintroduced National Savings five-year inflation-linked bonds, paying interest equivalent to retail price inflation (RPI) plus half a per cent - and tax-free. These are market-beating returns and you can invest up to £15,000. If inflation averages four per cent, returns will be equivalent to 5.6 per cent a year for basic rate taxpayers, 7.5 per cent a year for 40 per cent taxpayers (anyone earning over £42,000) and a whopping nine per cent for top rate taxpayers (those earning over £150,000).
The Bank is still focussing on helping the borrowers
Apart from this, savers' options are more limited. If inflation falls sharply, then perhaps the five-year five per cent bonds will do better and there are some good quality shares with high dividend yields, but these returns are all taxable.
The best hope is that inflation falls, interest rates eventually return to more normal levels and the squeeze on consumers and savers stops. Unfortunately, there is no sign of this happening. Here's hoping.
Ros Altmann is the director general of Saga and a former government pensions adviser.