Petrol prices drive inflation ahead of forecasts again, piling on more misery for savers

Sarah Coles, personal finance analyst at Hargreaves Lansdown, comments on the publication of the ONS inflation data for June, showing petrol prices drive inflation ahead of forecasts again, piling on more misery for savers.

Key points from ONS document:

• The Consumer Price Index measure of inflation was up again to 2.5% in June (up from 2.1% in May). It was up 0.5% in a single month.
• This raced ahead of forecasts yet again, which had expected inflation of 2.2%.
• This is the highest it has been for almost three years – since October 2018. The Bank of England expects it to reach 3% before falling back.
• The biggest sectors pushing prices up were fuel, second-hand cars, clothing and footwear, eating and drinking out. Most of these sectors saw prices fall in June 2020, but they rose last month.
• Inflation is running way ahead of savings rates. You can currently make a maximum of 1.66% in a standard savings account, and that involves tying your money up for five years.

Sarah Coles says:

“Inflation has raced ahead of forecasts again, as we fill our homes and driveways with the things we need to adapt to major lifestyle changes. Higher inflation is the last thing that savers need.

“Petrol prices have driven an awful lot of this rise, as life has restarted around the world and boosted demand globally. Meanwhile, disagreements at OPEC are compounding the problem, as they can’t agree to increase supply.

“Meanwhile, adjusting to the new normal has meant buying an awful lot of stuff we wouldn’t normally be so keen on. Drives are filling with second-hand cars as we give public transport a miss, and lounges are filling with new sofas, as we resign ourselves to many more hours in front of the TV. This has pushed prices up in these sectors.

“Higher inflation was the last thing that savers needed. The average easy access rate is now 0.06%, and the most competitive without restrictions is 0.5%. Even tying your money up for 12 months will earn you a maximum of 1.1%, which is less than half the rate of inflation.

“It means we need to hunt down the best possible rate, so our savings work as hard as possible. For any cash beyond our emergency savings of 3-6 months’ worth of essential expenses it’s worth considering tying it up for a better rate.

“Most people think it’s not worth bothering to switch, because rates are so low right now. It’s why the majority of our savings is still stuck in easy access accounts with the high street giants earning 0.01%. However, you can make 50 times the interest in the most competitive easy access accounts and you have to ask yourself what the alternative is. If you’re going to sit tight and wait for your bank to offer you more, you could be in for a hell of a wait, because the market expects the Bank of England to keep rates at 0.10% until 2023.

“It’s also worth taking a closer look at how much we have in cash. Once you have an emergency savings fund of 3-6 months’ worth of essential expenses, and cash to cover the next five years of planned expenses, for any sums you don’t need for 5-10 years or more, it’s worth considering whether you could invest some of it. This involves risk, and the value of your investments will rise and fall in the short term, but it at least has the potential to grow faster than inflation.”

The risers

“The cost of filling up the car has driven the biggest rise in inflation. It’s up 20.3% in a year, which is a faster rise than we’ve seen for more than a decade (May 2010). Average petrol prices have risen from 106.5p per litre last June to 129.7p per litre. Petrol hasn’t been this expensive for almost three years – since October 2018.

“Part of this phenomenal price rise is due to the fact that last June we were still in the first lockdown, and people were hardly driving, so prices were at rock bottom. The recent growth of global demand also bears a big chunk of the responsibility, and disarray at OPEC isn’t helping, because their inability to agree increases to production are restricting supply and making price rises even sharper.

“Second-hand car prices are also on the up. We’re still rethinking how we get about in an environment where so many people feel less safe on public transport, which has boosted demand. The reopening of dealerships has released some pent-up demand, which has allowed dealers to increase prices. They’re also benefiting from the fact that a shortage of chips means supply problems with new cars, which is persuading more people to opt for a second hand model instead.

“We’re still spending money on our homes, which this year is pushing prices up for furniture, household equipment and maintenance. So many have given up so much of our social lives in exchange for more time on the sofa, so we may as well splash out on a new one.

“Electricity and gas bills, meanwhile, have been pushing inflation up since the price cap on the standard rate was increased in April. This is magnified by the fact the price cap had fallen a year earlier.

“And clothing and footwear continue to add to inflation, partly because of the odd seasonal pattern last year which meant much bigger discounts in June in an effort to clear unsold stock from the first lockdown. There’s also an odd pattern this year, because prices were cut in January and February, during lockdown, so the season is running slightly later than usual, and the usual summer sales didn’t kick in for another month.”

What next?

“Views on the outlook for inflation are like tongue-prints. Everyone has one, each one is different from the last, and it’s not always something that’s better when aired.

“The Bank of England expects inflation to keep rising this summer, and hit 3% before dropping back. It’s currently sticking with its forecast that this will be a temporary blip that will drop back once last year’s lockdown lows fall out of the figures. It says it’s not planning to raise rates in the immediate future. This isn’t a million miles from the position of the Federal Reserve in the US.

“However, inflation prediction is always a thorny business, and there are some indications that we could be seeing the beginning of an inflationary cycle, as commodity price increases have now fed through into factory gate prices, which in turn could then feed into price rises.

“There’s also the chance that the pandemic hasn’t delivered the last of its nasty surprises. If new variants mean closures and restrictions, it could wipe out most of the inflationary pressures overnight, and inflation could drop back even sooner than expected.”

Kindly shared by Hargreaves Lansdown

Main photo courtesy of Pixabay