Jeff Salway: Beware the flurry of inflation-linked savings products

THE UK’s high street banks believe inflation is past its peak and set to go down next year. They haven’t said so explicitly, but the recent flurry of inflation-linked savings accounts to hit the shelves tells us all that we need to know.

The inflation-linked savings deals that hit the shelves in the summer each sparked a frenzy that resulted in some being withdrawn within weeks because of over-demand. NS&I’s inflation-linked certificates were pulled in September, just four months after being re- issued, while the Post Office’s inflation-beating savings bond was taken off the market in late November, just six weeks after launch.

But something has changed – just as it becomes clearer that inflation is heading back down. Tesco and Santander are the latest big names to issue eye-catching inflation-linked bonds, adding to a stream of accounts launched after the retail prices index (RPI) inflation measure on which they are based reached a high of 5.6 per cent in September. You might wonder why that recent peak triggered a new wave of inflation-linkers. It might be something to do with the Bank of England’s November inflation report, which forecast a sharp fall in 2012.

Not only that, but very few economists expect inflation to return to those recent highs before 2015, at earliest.

The November fall in the headline inflation rate from 5 to 4.8 per cent, revealed on Tuesday, was the second successive monthly decline. Capital Economics responded to the news by predicting a potentially sharp inflation fall next year that could even take us close to deflation.

This is a trend that savings providers clearly picked up several weeks ago, aware that by exploiting fears over inflation they could pull in millions of pounds from savers in return for modest payouts. Savers have been slower on the uptake, however. With the cost of living rising for most of the past year, it may feel logical to tie into savings accounts that promise to beat inflation.

But with the terms on the accounts ranging from three to eight years, savers may eventually be stuck in products paying far less than many cash Isas or fixed rate bonds. And that means they could miss out on hundreds of pounds in returns over the term.

Too many people have discovered to their cost that it pays to be sceptical when a trickle of products becomes a flow as more providers jump on the bandwagon. With the latest inflation-linked offers selling like the proverbial hot cakes, it seems plenty more will learn that painful lesson over the coming years.

No simple answer to payday loans fears

Handwringing over payday loans is fast becoming a staple of the financial pages at Christmas, as thousands of people use them to fund their festive spending.

The basic argument is that they are extortionate, reckless and should be banned, or at least tightly regulated. And that is a dangerously basic argument. Demand for payday loans reflects a need for them.

The problem is that with APR percentages in the thousands, payday loans are potentially extortionate, representing the last buffer between the financial services industry and the loan sharks. The APRs can be misleading, of course. Payday loans repaid over the short term intended have interest charges far lower than the annual rates advertised.

However, for every customer paying back within a month or two, another is trapped in a spiral of debt because of the rapid escalation in charges. That’s why there are justifiable concerns over payday loans, which many more people will take out as household incomes are squeezed further over the next year.

There have been calls for a cap on loan levels, which may work. The difficulty here is that the charges reflect the risk to the provider; cap the charge and more people will be rejected for the loans and turn to even costlier options.

Tighter restrictions on advertising would be welcome, as the loans are generally promoted on TV as an enticing, stress-free way of getting quick cash.

But an outright ban will only work if conditions are right. That’s when people are given a better grounding in financial education; when free debt help sources such as Citizens Advice are given more support; when credit unions are better promoted; when people have a greater understanding of their rights (such as under the Consumer Credit Act); when unemployment isn’t rising and a government austerity programme hitting those on low incomes the hardest; and when high street banks are incentivised to do more for those in financial difficulties.

Only then can payday loans be tackled in a way that doesn’t make matters worse for millions of people who feel they have no other option.