By Dr Ros Altmann, Director-General of Saga

The fact that inflation is still above the Bank of England’s 2% inflation target is dreadful for savers as the combination of low interest rates and high inflation has had disastrous effects on disposable incomes and the spending power of millions of households which means monetary policy has actually damaged significant parts of the economy.

Annual food price inflation picked up from 3.4% in September to 3.9% in October. This is a significant problem for many older people and lower income households who spend a much larger proportion of their income on food and with energy price increases in the pipeline the pressures on these groups will get worse.

This week, Saga’s final Quarterly Report of the year revealed that inflation expectations among the over 50s have risen this quarter, from 4.6% to 4.8%, which is something that policymakers should be concerned about as older people continue to cut back on their spending.

The latest suggestions from our next Bank of England Governor to abandon an inflation target would be a very dangerous move as inflation is damaging growth through its impact on spending. Our reports show that each quarter, older people are cutting back on their spending as a result of high inflation.

Inflation on both the RPI and CPI measures remains higher for over 50s compared with the UK as a whole according to our Saga Price Indices*, compiled by research house Cebr. Indeed, the cost of living in November 2012, compared with five years ago in September 2007 has risen substantially more for the over-50s than the overall population.

Older people are not generally benefitting from a lower real value of debts or lower mortgage rates. They are often on a fixed income or trying to live off their savings and finding that inflation is eroding their spending power.

Compared with September 2007, the cost of living has risen for different age bands as follows:

o 50-64: 20.4%
o 65-74: 23.9%
o 75 and over: 23.8%
o Whole population (RPI): 18.1%

Given that expenditure patterns vary across households, experienced inflation rates will differ across age-bands. We calculate that annual consumer price index (CPI) inflation was as follows for the over 50 age bands in November 2012 (October 2012 figures in brackets):

o 50-64: 2.9% (2.9%)
o 65-74: 2.5% (2.4%)
o 75 and over: 2.6% (2.5%)

Join us on
Follow @freshbusiness