Why savers will win and borrowers will lose this year

THERE was good news and bad news in the inflation data that was published last Wednesday (24 May).

The Office for National Statistics numbers showed the headline rate of inflation had fallen to 8.7% in April - back under 10% and to its lowest level since March 2022. 

Not so good was that this fall was less than expected, and largely driven by the mathematical effect of last year’s energy price rises falling out of the year-on-year comparisons. Once you looked beyond the headline numbers, and taking account of that energy effect, price rises still look daunting for households. 

Prices for food, in particular, are rising at an alarming rate. The aggregate price of food and non-alcoholic drinks rose by 19.1% in the year to April, but underneath that pasta rose by 27.7%, milk, cheese and eggs rose at 29.3%, olive oil rose by 46.4% and sugar rose by 47.4%.

That’s dismaying for families trying to keep up with the cost of the weekly shop.

As well as implications for households, the inflation data also contained worrying signals for policymakers at the Bank of England. They will have seen core inflation - a measure that strips out more volatile elements from the numbers - not falling but rising, from 6.2% in March to 6.8% in April.

That means the rapid series of interest rate rises imposed by the Bank - the longest run of rate rises in history - is not yet slowing price rises in the real economy. With the Bank rate already at 4.5%, further rises to 5% and beyond are now possible. And even once interest rates do pause, they are likely to stay elevated for several months before falling only very slowly.

This will create winners and losers. The winners will be those able to save money and to take advantage of higher cash savings rates, which should stay elevated for a while yet and may even rise in the coming months. Savers have been enjoying rising rates on cash for some time and the highest-paying account now returns 5% a year - but those rates haven’t meant much in the face of inflation which is above 10%. 

However, with inflation coming down more quickly - further falls are forecast for the coming months. We may reach a point this year when cash rates begin to exceed price rises.

A similar moment may happen with wages. At the last count, regular pay (excluding bonuses) was rising at 6.7% a year. If pay rises maintain that level and inflation continues to fall workers could, at last, feel the benefit of real term pay rises.

The big losers, of course, will be borrowers who will see the cost of their debt continue to rise. The average cost of a 2-year fixed-rate mortgage is now 4.79%, according to broker Better.co.uk. Many mortgage borrowers will be on fixed-rate deals with much lower rates but will face a rise of two or even three percentage points when they come to remortgage. For example, someone owing £200,000 on a mortgage with a current rate of 1.79% but remortgaging at 4.79% would see their monthly repayments jump by £218.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.