Monday, 28 March 2011

Is just beating inflation the best strategy?

It always pays to look ahead when you are choosing a home for your money.

I don't know what inflation will be next year and the year after, or even in five years' time. But that's the crucial consideration if you're thinking of putting savings in the new inflation-proof certificates which the Chancellor has directed National Savings to provide.

Understandably, we're all talking about Index-Linked Certificates selling out when National Savings relaunch them. They were withdrawn last summer for the first time in 35 years, after £5bn flowed in in a mere three months.

And those who have them are congratulating themselves on securing a risk-free return of RPI plus 1%, at a time when RPI inflation is 5.5% and even the best cash ISAs rate is 3.3%.

But will they be worth it? In particular, will we reach a stage soon when inflation is LESS than the better savings rates?

In last week's Budget, RPI was forecast to be lower but still high, at 3.6% next year and 3.5% in 2013. The prediction for 2015 is 3.8%. One reason is that interest rates will start rising and that props up the RPI measure.

So far so good for the certificates.

But one pessimistic member of the Bank of England's Monetary Policy Committee, Adam Posen, believes that inflation will be lower than expected next year as austerity takes hold.

The British Chambers of Commerce and IHS Global Insight suggest RPI will be 2.8% next year. Capital Economics says 2.6% and Cambridge Econometrics 2.5%.

These are the lower end of economists' forecasts, which tend to be a bit more. But it makes you think: Index-Linked Certificates might be very safe, but they won't necessarily give the best result over the fixed period of 3 or 5 years.

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