Protect your finances against inflation

The latest inflation figures reveal prices have increased by more than expected. Record petrol price rises and fresh VAT hikes will see Britain suffer the highest rate of inflation in the western world. We show you how to beat the scourge of rising prices.

The official rate of inflation - the Consumer Prices Index (CPI) has risen by more than expected to 3.40% - up from 3% in February. This is well above the Bank of England's 2% target figure. The reality is that prices across the board are climbing sharply. Petrol prices are creeping towards a record high, with the average price of a litre now an eye-watering 119.9p, according to new figures from the AA.

The weak pound and rising transport costs will push supermarket prices up, while January saw the rate of VAT revert back to 17.5% - and after the Election it could rise to 20% as the new Government struggles with Britain’s ballooning national deficit. This triple-whammy of price rises will in fact see Britain lead the western world in inflation this year, according to projections from investment bank ING.  

• Watch our Beat rising food prices video.

The analysts at ING are already factoring in further hikes in VAT into their inflation forecasts - suggesting that we’re set to suffer a full year of rising prices. And that mean savers and shoppers will need to be careful and look to beat inflation wherever they can.

What to do with your savings

In the current climate of low interest rates and rising prices, savers are suffering more than most. Savers are in fact being paid the lowest amount of interest since records began, according to official figures from the Bank of England - with tax-free cash Isa accounts currently paying an average rate of just 0.47%.

Yet to beat the effect of 3.4% inflation basic rate taxpayers need to find a savings account paying 4.25% to break even, according to figures from analysts Moneyfacts - and higher rate taxpayers need to secure a rate of 5.64%.

So if you don’t want your cash savings to erode in real terms, you need to look elsewhere. There are two main options open to savers and both will require locking your money away for a set period of time. The first is to secure one of the best fixed-rate savings accounts on the market.

There are several available deals paying returns in excess of 4%. Leading the way for deals available to open online is the Nationwide 5 Year e-bond which pays an impressive 4.75%. The minimum opening deposit is just £1 and the 4.75% rate is guaranteed for the five-year life of the bond. Interest on the account is paid on an annual basis.

If you don’t want to tie your money up for five years - or would prefer to see what happens to savings rates in the medium term - then you’ll need to look to for a three-year bond to guarantee an inflation-beating return. Leading the way is the ICICI Bank Fixed Rate Account, which pays an impressive 4.6% but requires a minimum deposit of £1,000. Interest is paid at the end of the three-year period.

If you want an account with fewer strings attached, the Nationwide 3 Year e-bond pays 4.15% on balances of £1 or more with interest paid yearly. Alternatively, you may want to look to the Lloyds TSB 3 year e-bond, which pays 4.1% on a minimum balance of £1,000.

The other alternative open to savers - and one which guarantees a return above inflation - is the range of index-linked products available from Government-backed National Savings and Investments or NS&I. Its range of three-year and five-year Index-Linked Savings Certificates are tax-free and guarantee a return of 1% above the Retail Price Index (RPI) measure of inflation, which includes mortgage repayments and is currently 4.4% (up from 3.7% in February). The minimum investment is £100 and inflation is calculated at the start and end of each investment year. Returns are paid annually.

Inflation-beating spending tips

Motorists are set to be hit hardest by rising prices over the coming year, with prices at the pump set to beat the 120p a litre barrier. Fortunately, there are ways to combat these massive price hikes. The first is to hunt down the cheapest prices in your area by signing up to price comparison website Petrolprices.com. Registration is free and signing up allows you to enter your postcode and find the cheapest petrol outlets in your area.

Another way to cut petrol costs is to sign up to any available loyalty schemes - both Tesco and Sainsbury’s allow shoppers to collect Clubcard and Nectar points on fuel purchases, which you can use to subsidise your food shopping. You can also opt to utilise a cashback credit card to gain further rewards when you fill up. Find out how to cut your petrol costs by a third for more information.

• Join our Cut your food bills goal.

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Cut your food bills

As food prices continue to rise, here's some handy ways to keep your food bills under control.

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Here at lovemoney.com we have myriad ways to cut the cost of food and supermarket shopping but if you’re planning to make a big ticket purchase in the coming months it could pay to think strategically. Items such as digital cameras, clothing and computer games have all risen in price over the past year, but homeware, white goods and TVs have all become cheaper over the past year, according to the British Retail Consortium.

If you have a big purchase to make it could pay to take out a 0% credit card before prices start to rise and pay it off within the interest-free period. Among the best deals for new purchases are the Sainsbury’s Finance Mastercard and the Tesco Bank Mastercard. Both offer 0% on new purchases for 12 months and before reverting to 15.9% and 16.9% respectively. You will, however, need a Nectar loyalty card to apply for the Sainsbury’s card.

Why not make it your goal to save even more? Or take control of your finances with our online banking tool?

More: Earn a higher rate on your savings | Five ways to increase your savings