How inflation is deflating savings

The latest announcement by the Office of National Statistics revising the consumer price index (CPI), which the government uses as a measure of inflation, has shown a rise from 2.5 per cent to three per cent - mainly due to rising gas, electricity and heating oil costs.

Households are increasingly having to absorb price increases in food, mortgage re-negotiations, utility and car running costs and this is affecting their levels of savings.

David Kuo, head of personal finance at Fool.co.uk, says: "The erosion of the amount of money we save each year strongly suggests the true rate of inflation is gradually crippling household budgets.

"The gap between what we earn and what we spend means we have less money to put away. But as the hole turns into a chasm, we are required to patch up the deficit with money previously salted away. However, a point is reached when the gulf can't be bridged."

Many political commentators and financial advisors question the CPI as a measure of true inflation. Some estimates of the cost of inflation put the figure closer to eight per cent, and so Fool.co.uk calculates that by 2012 households will need an additional £8,000 per year to match income levels in 2002.

14/05/2008 17:50:00