Consumers 'Don't Know' About Effect of Inflation on Savings

The effects that inflation and tax have on savings are not fully understood by many consumers, it has been claimed.

According to a new poll from National Savings & Investments (NS&I), 31 percent of people know what inflation is, but do not know how it impacts on their savings. A hard core of nine per cent were also found to not know what inflation is at all.

Rising prices erode the value of cash savings, as money saved in the past becomes less valuable as time goes on. For example, the UK inflation rate currently stands at 3.8 percent, according to the government's preferred benchmark: this means that £100 saved a year ago is worth 3.8 percent less now.

Other findings of the research showed that older people tended to have more knowledge of the issue, with just 17 percent and 16 percent of 55 to 64-year-olds pleading ignorance about the effects of inflation and tax respectively. Among 16 to 24-year-olds, these figures stood at 41 percent and 45 percent.

Commenting, John Prout at NS&I said: "It appears that an understanding of the impact of inflation and tax on savings increases as we get older. The younger generations, who have grown up in a time when the economy has seen low levels of inflation need to also be aware of the effect of inflation on our savings as well as our outgoings."

He added: "It is concerning that many people don't understand what inflation is, or how it might affect decisions about saving or spending money. Inflation means that prices increase over time, so £100 today will buy you a little bit less in a year's time. It can be caused by increases in salaries, increased demand for items or a decrease in supply which all push prices up."