Worried about Inflation? This Savings Bond is Inflation Proof
July 2007
Inflation is and continues to be a real problem. Almost all living costs have increased - the price of petrol, food, utilities etc. continues to rise, in some cases alarmingly so.
Not only do we dislike having to pay these extra costs but inflation is having a disastrous effect on our cash savings.
According to Government figures* inflation is presently running at 2.4% via the CPI or 4.4% via the RPI.
- CPI - Consumer Price Index - the price of a basket of goods not including housing costs
- RPI - Retail Price Index - the price of a slightly different basket of goods, plus housing costs eg mortgage payments
* Most Government figures are not entirely correct because it’s in their interests to fudge them. This either makes them more appealing to the electorate, or in the case of inflation to save money. If the official reports state that inflation is 3% (when it is actually 4%) it means the Government can get away with paying less (in yearly wages/benefits) to state workers and other central payments such as pensions.
The effect of Inflation on Savings
If inflation is running at 5% the goods which you buy now for £100 will cost you £105 next year. This means that savers will have to earn at last 5% more just in order to keep the purchasing power of their cash. It is very easy to believe that your savings are increasing because of the interest you’re earning but in reality you are probably just treading water or many cases these days even losing money.
Why 'many cases'? Simple, because there are at present billions of pounds worth of savings in deposit accounts paying less than 4% a year. This is mainly due to apathy, people not bothering to keep on top of their financial affairs.
The Leeds introduces an Inflation Busting Bond
The main problem with inflation is that when it gains momentum, as it is now, it’s very difficult to stop it. Inflation has been getting higher over the last few years and it seems unlikely that the trend will be reversed in the near future. It is important to remember that this is not merely a UK problem, it is global.
The Leeds Building Society has therefore introduced a Bond called the 'Inflation Buster Bond', the main details of which are -
- 2 year duration
- interest rate is 3% + the current RPI, this means presently the rate is 7.4% gross
- As the interest is linked to the RPI it means the overall rate paid can go up as well as down
- Minimum investment is £1,000 and maximum amount £1,000,000 (the maximum for a joint account is £2,000,000)
- Annual interest is calculated daily and is paid on 31 August
- No withdrawals are permitted until maturity (31 August 2009)
Summary
We like the concept of this bond. If you are concerned about inflation and your savings, you should seriously consider the advantages of this fixed rate bond linked to the inflation figures.
The only disadvantage to the Inflation Buster Bond is that it has no flexibility, ie no withdrawals can be made, and therefore would not be suitable if you may need access to your cash at short notice.
However, for those with adequate cash savings who are worried about inflation, it would be prudent to consider putting up to 25% of your total cash savings into this bond, or a similar savings account that has inflation safeguards built in.
See Also
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