As experts warn of gloomy times ahead, Teresa Hunter has some advice to lessen the financial pain

Published on Saturday 21 November 2009 14:16

ADOUBLE whammy of rising prices and higher taxes is facing everyone in the UK. So it has never been more important for us to make smart decisions about buying and investing.

Prime Minister Gordon Brown has declared his intention to halve public debt in four years, signalling higher taxation is on the way.

This will bite against a background of price rises, according to Bank of England governor Mervyn King, who has warned of sharply climbing inflation over the coming months.

House prices are already increasing while the falling pound has pushed up the cost of holidays and all imported goods and materials. Motoring and energy costs are also soaring, as fuel prices increase. On top of this, the hike in value added tax (VAT) due at the end of the year will lead to higher prices for clothes, furnishings, carpets, home improvements and most consumer goods and services.

As measured by the Consumer Prices Index, which excludes all housing costs, and is the government's preferred indicator, inflation reached 1.5 per cent in October, up from 1.1 per cent in September. But the expectation is that it will rise further in the months ahead, topping the 2 per cent target, and possibly reaching 3.5 per cent. After that it may fall back again, as austerity measures grip. However, King admits the outlook, beyond the next months, remains uncertain.

The alternative Retail Prices Index, which includes an element of housing and mortgage costs, fell by 0.8 per cent, reflecting low interest rates and lower property values. Yet the slide in prices was smaller than September, when they tumbled by 1.4 per cent, pointing to a reversing trend.

Finally, RPIX inflation, which excludes mortgage costs, was up 1.9 per cent in October, compared with 1.3 per cent in September, repeating the story that only zero interest rates is keeping a lid on RPI. In due course, when rates rise again, this will also push up the index.

The prospect of sharply rising prices, even in the short term, will worry households, at a time when their incomes are being squeezed.

But panic not. Consumers can ride out the storm with some sensible planning and bag a bargain at the same time by striking while the iron is hot.

Motoring

A move to a smaller car is worth considering, but insurance and road tax brackets should be checked as similar vehicles often fall in surprisingly different groups.

Cutting down on car use is also worthwhile, either by walking more or switching to public transport.

Car sharing or joining a car club should also be considered, where practical, while sharing journeys also helps.

With diesel already 5 per gallon, and petrol heading in that direction, it is vital to shop around by comparing prices in your area. A useful website is www.petrolprices.com.

As a rough rule of thumb, the supermarkets are among the cheapest and also offer loyalty points or other incentives.

Tesco offers 5p per litre off for store customers and a clubcard.

Further discounts are available with an AA cashback credit card, which give one point per 1 spent at the pumps; 100 points are worth 2 to buy AA goods from its catalogue, or 1 for other retailers' goods. The same number of points can also be traded for 50p off at the pumps. Points double for AA members.

Hunt out the cheapest places to park. Check out www.yourparkingspace.co.uk, where individuals rent out their drives or parking spaces.

Finally, keep an eye on tyres. Ten per cent under-inflation leads to a 2.5 per cent reduction in fuel efficiency, not to mention a 15 per cent acceleration in the rate of tyre wear.

Avoid VAT hike

VAT is rising from 15 per cent to 17.5 per cent from the end of this year. It therefore makes sense to bring forward big purchases, such as carpets, furniture, a new bathroom or kitchen. VAT is expected to rise further to 20 per cent, and there is speculation is could be charged on exempt items such as books and children's clothes.

Property

UK property prices have risen by more than 7 per cent since March, according to the Nationwide, or 2 per cent up compared with a year ago. Moreover, affordability has now bottomed, according to economists Lombard Street Research. At some stage interest rates will rise, pushing up property costs, although the Bank of England has indicated rates will stay at historically low levels for many months yet.

It is possible we have seen the nadir in property values, so now is a good time to begin looking at options. However, a further slide in prices cannot be ruled out, so buyers should negotiate hard on price.

But whether buying now, or an existing homeowner, begin planning for mortgage rate rises to come. Consider fixing payments. HSBC and First Direct offer a 2.99 per cent two-year deals for a 25 per cent deposit.

Otherwise is would be wise to start salting away spare cash so the payment hike can be met when it comes.

Savings

Low interest rates and higher inflation spell double trouble for savers, which could be compounded again if taxes rise next year. Basic rate taxpayers need to earn at least 1.8 per cent to protect the value of their savings and ensure they rise at least in line with inflation.

Yet hardly one in ten basic deposit accounts is providing such a return, says moneysupermarket.com.

It is essential to protect savings from tax, so open a cash Isa. After that, use best buy tables (see page eight) and the internet to search out the best returns. Exploit telephone, postal and online savings, since it is no longer necessary to invest through a local branch. Index-linked savings certificates are linked to the RPI, so not worth considering at present. But when the RPI moves back into positive territory, the certificates pay 1 per cent tax-free above the growth in the index.

Pensions

Protecting future buying power is essential when your earning days are over. However, most people opt for a level annuity, which pays the same income from day one of retirement.

Index-linked annuities are expensive, and many people are not prepared to forego the extra income in early retirement, when they are active and want to enjoy their new-found freedom, in order to have more if they live to a ripe old age. However, it makes sense to index-link at least a part of your retirement income.

Holidays

With the pound weak, overseas travel is no longer cheap. However, there are still some bargains to be had. According to the Association of British Travel Agents, holidaymakers are going further afield with bookings to Africa sharply up. The recent weakening of the dollar has seen renewed interest in crossing the Atlantic. But the Eurozone remains expensive. The cheapest option is to stay at home, if you don't mind chancing the weather.