Falling Inflation Is A Disaster For Savers

If you’re a homeowner with a mortgage, you’ll be celebrating the news that inflation fell to the shockingly low rate of 1.2% in July.

That was a far greater drop than expected, down from 1.5% in August, according to the Office for National Statistics.

This is good news for borrowers because it means the Bank of England will be in even less of a rush to hike base rates.

It frees mortgage lenders free to continue their current price war. Borrowers can now get five-year fixed rates from an incredible 2.59%.

If you’re a saver, however, today’s inflation figure is a disaster.

Crystal Balls

Banks and building societies now have even less incentive to hike today’s dismal deposit rates.

The prospect of a first base rate hike in the spring, which Bank of England governor Mark Carney was hinting at just a few days ago, was the only glimmer of hope on the horizon.

Now that hope has been snuffed out. Carney’s crystal ball has failed again.

The main reason the Bank of England would hike base rates is to stop inflationary pressures from building up, but there are no such pressures.

Food prices fell 1.5% in September compared to one year ago, the largest decline for more than 12 years. 

More than one in four workers have had their pay or bonus cut in the last year, while half reported company redundancies, according to new research from Glassdoor.

Interest rates are going nowhere.

Deflation And Denial

The UK could even end up like Japan, with base rates have been held at record lows for more than two decades. Imagine what that would do to savers.

Europe is making matters worse, thanks to the disastrous single currency experiment.

Italy and Spain are already in deflation, with prices falling 0.2% in the past year. Germany and France aren’t far away. They could drag the UK down with them.

You Can Do Better

Savings rates are in a death spiral.

If you had popped £10,000 into the average account five years ago, its spending power would be just £8,730 today after 20% tax, a fall of 12.7%, according to

All is not lost. You can generate income of more than 5% a year by investing in the shares of dividend-paying companies.

Centrica, for example, which owns British Gas, currently offers an astonishing yield of 5.8%. National Grid, a rock-solid utility, yields 4.8%.

Pharmaceutical giant GlaxoSmithKline and mobile phone company Vodafone both yield more than 5.75%, while oil giants BP and Royal Dutch Shell yield more than 5% a year.

There are risks to investing in stocks and shares, as we've seen in recent weeks, but today's dismal savings rates will do real long-term damage to your health.

But why put up with savings rates of 1% or 1.5% when FTSE 100 Dividend Stocks Offer A Far More Generous Income, plus the prospect of capital growth on top when stock markets rise. 

Our latest special Motley Fool report, How To Create Dividends For Life, demonstrates how reinvesting dividends for growth can help you build long-term wealth in a low interest rate world. 

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The Motley Fool has recommended shares in GlaxoSmithKline.