Inflation is falling but the pain isn’t over yet – here’s what savers should do

I’ll start off with the good news. Last October, the consumer prices index peaked at a staggering 11.1 percent.   This morning, we learned that it had fallen to 6.8 percent in the 12 months to July. That’s a sharp total drop and more than a full percentage drop from June’s 7.9 percent. It’s not good enough, though. Nowhere near. July’s plunge was mostly down to falling gas and electricity prices, after last year’s huge spike dropped out of the annual figures. The lower energy price cap, which came into force on July 1, helped here. The other major inflation driver, skyrocketing food bills, actually increased by 14.8 percent in the year to July. That’s down from 17.3 percent in June. Worse, the fall out from the Ukraine war, with Russia threatening grain exports, could keep wholesale prices high. As could this summer’s extreme weather. Core inflation, which strips out volatile items such as energy, food, booze and fags, held firm at 6.9 percent. I see little to celebrate here. Especially since this monthly drop may be the best we see in quite a while. We can’t even escape the misery by taking a cheap flight overseas. Airline fares are rising along with almost everything else. The Bank of England may be the world’s worst forecaster but it’s rate-setting Monetary Policy Committee (MPC) is probably right when it warns that future interest rate falls will be ‘incremental” rather than substantial. So this is something of a false dawn. Future inflation drops may arrive at a slower pace (Image: Getty) Which is terrible news for mortgage borrowers as the MPC is almost certain to hike base rates yet again to 5.5 percent at its next meeting on September 21. Base rates could peak at six percent which would drive borrowing costs even higher. Lenders have been cutting mortgage rates in recent days. Unfortunately, that trend may soon come to an end so borrowers nearing the end of a low-cost fixed rate should grab a good remortgage deal today if they can. At least today’s inflation figure is good news for savers. While I don’t expect interest rates on best buy fixed rate bonds to rise much, easy access accounts will pay more. Yet with the very best account paying 6.1 percent savers will still be getting less than inflation. If I had cash to spare I’d be sorely tempted to lock into a five-year fixed-rate bond today, with RCI Bank paying up to 5.80 per cent. Within two or three months, that could be an inflation-busting rate of return. There is no guarantee, though, these things are impossible to predict. The FTSE 100 has fallen today, as investors fear higher interest rates that will squeeze profits, while investors can get five percent yields on gilts with less risk. This is bad news for pensioners to have left their retirement savings in drawdown, as their value will shrink. As will the value of our stocks and shares Isas, with the US stock market now falling too. READ MORE: Core inflation remains high as Britons will still feel pinch despite CPI plunge So far, the UK economy has shown astonishing resilience and avoided the brutal recession that the BoE predicted last year, which it claimed would last for longer than a year. That’s just one of many predictions the BoE has got horribly wrong .   Yet it will now pull out all the stops to make sure we do get a recession. It sees this as the only way of beating inflation: by destroying businesses, jobs, incomes and living standards. Our economy desperately needs growth but instead policymakers launching a scorched earth policy, when many including myself reckon it won’t have much effect on inflation anyway . Today, we’re worrying about inflation. I suspect it won’t be long before with worrying about a recession, too. Naturally, the government would like us to see things differently. Chancellor Jeremy Hunt rushed out a press release doing his bit to claim the glory saying: ‘The decisive action we’ve taken to tackle inflation is working, and the rate now stands at its lowest level since February last year.’ I have two problems with this. First, there isn’t much glory to claim. Second, falling inflation has got nothing to do with “decisive action’ taken by HM Treasury. It’s largely out of Hunt’s hands but as I’ve written before, he’ll desperately try to claim the credit for it anyway. Worse, Hunt has made the cost-of-living crisis even more painful by hiking taxes and freezing thresholds, making everybody feel poorer. Today brought a bit of good news. We’ll need a lot more of it before things really start to get better.