Taking steps to beat the rising tide of inflation

THE fight against inflation is one of the biggest battles facing families in the months ahead as rising prices eat into already stretched household budgets.

The latest Office of National Statistics report showed that the consumer price index (CPI), the government's measure of inflation, now stands at 4.5 per cent, more than double the long-term target of 2 per cent.

It was the fastest rise since October 2008 and the Bank of England has warned that inflation could rise to 5 per cent this year, prolonging the agony for families as bills rise, savings income evaporates and earnings fall. But there are a number of things households can do with their savings, investments and everyday finances as they try to limit the impact of inflation. Box one, right, shows just how much the price of everyday items jumped in the first decade of the new millennium. Everyday spending is something we just can't shy away from, but that doesn't mean we have to pay top dollar.

Prices at the pumps, for example, might be going through the roof, but buying the cheapest petrol in your area could save a lot of money over the course of a year. At the time of going to press, the difference between the cheapest and most expensive litre of petrol in Edinburgh's EH1 postcode was 6p, as quoted on www.petrolprices.com. That's a difference of 3.60 for every 60-litre tank of fuel you buy. With many people getting through a tank a week, that equates to 187.20 over a year.

Price-checking sites also exist for mobile phone tariffs, supermarkets, energy suppliers and virtually every personal finance product available in the market (as listed in box two.)

Inflation is also forcing us to be savvier when it comes to investments and savings. Figures from financial researcher Defaqto show that a mere 1.1 per cent of all savings products currently available offer basic rate taxpayers a positive return after taking into account the effect of inflation.

For a 40 per cent taxpayer that figure tumbles to 0.7 per cent and for a 50 per cent taxpayer it is only 0.6 per cent.

Chris Brown, director at IFA firm Begley Brown Financial Solutions, said: "After a good few years when inflation has been kept in check, many younger families are facing up to its impact for the first time.

"It is difficult to know how high it will go, but those who remember the double-digit rates of inflation we saw in the 1970s and early 80s understand just how hard it can hit your pocket."Whether looking at savings or investments, it is important for people to use their money as efficiently as possible and to regularly assess how it is performing."

If you have money to put aside, using up your full individual savings account (Isa) allowance is one of the best ways to safeguard any interest that is earned. Limits for this year have been increased and you can now save up to 10,680 tax-free in an Isa, of which up to 5,340 can be deposited into a savings account. Using up this allowance should always be a priority.

Savers battling inflation were recently boosted by the relaunch of NS&I's five-year issues of its hugely popular savings certificates. These index-linked certificates pay an average of the increase in the retail prices inflation (RPI) index plus 0.5 per cent AER. The fixed interest certificates pay 2.25 per cent AER.

With RPI currently sitting at 5.2 per cent, the index-linked certificates are generating massive demand, raising the possibility that they could be withdrawn from the market - as they were last summer -in the face of competition concerns.

For those happy to dip their toes into stock market-based investments, there is more choice in terms of finding inflation beating returns, but these returns are not guaranteed and picking the right horse to back can be a difficult task.

Equity income funds, which rely on the high dividends paid by the underlying companies to bolster returns, are particularly popular, with the added potential bonus of gains in the price of the stock.

New pension legislation that came into play in April will also be of interest for those with money to invest.

Although the annual pension contributions allowance was cut from 255,000 to 50,000, full tax relief is available on the new 50,000 limit and any unused allowance can be carried forward for up to three years.

The 50,000 limit has also been applied retrospectively and from this year people can carry back three years and make up the shortfall on any unused past allowance.

If you put less than 50,000 into your pension in the 2008-9, 2009-10 and 2010-11 tax years, you are now allowed make this up tax efficiently

Not only can you seek out inflation beating returns with this money, but the tax breaks available also mean that 40 per cent taxpayers will only pay 60p for every 1 that actually goes into their pension.

The battle against inflation is likely to become increasingly difficult, but it should be possible to significantly limit its impact by taking decisive action.