For couples and individuals who rely on savings income to make ends meet times are getting bleaker. The Bank of England (BoE) Base Rate remains at an all time low of 0.5% despite the fact that Consumer Price Index (CPI) inflation is now running in excess of 4.5%. There certainly does not seem to be any appetite for the BoE Monetary Policy Committee (MPC) to raise interest rates in order to combat rising inflation.

This leaves savers with a ‘double whammy’. Firstly, the low rate of return on savings and secondly (and probably more significantly) lower real time earnings year on year.
So why aren’t the MPC reacting to these inflationary pressures?

On the face of it you would think that with inflation now having exceeded the Government mandated level of 2% since October 2009, that the MPC is overdue in raising interest rates to curb inflationary pressures. However it is quite clear that they do not see the need to use interest rate rises as a tool to bring inflation back down.

In my opinion this is commendable. Firstly, the economy is still in a highly fragile state and the Government austerity measures are yet to take full effect. Any rise in interest rates whilst the economy’s growth figures remain as low as they are, (just 0.5% in the first quarter of 2011), could tip the economy back into negative growth and potentially recession.

Secondly, many of the factors that are influencing the upward trend for CPI are beyond the MPC’s control. They have no influence on rising energy or commodity prices. These items are increasing in price not due to demand from UK consumers but due to excessive demand from other nations, predominately from emerging markets and China. Until these nations recognise that they are fuelling an ‘inflation’ time bomb and curb demand, prices will continue to rise.

At Proposito Financial Planning we consider ‘inflation risk’ as an inherent element of both our ongoing review processes and as part of the client’s exposure to overall risk. We can offer a range of portfolios which have historically delivered higher than inflation returns over the medium to long-term.