MSE News: NS&I revives inflation-beating savings certificates

oldvicar

philc27 wrote: »

Does anyone know if RPI includes the VAT rise? If so, the inflation rate next year will be significantly lower once that 2.5% has been removed from the equation.

It does. The VAT rise has temporarily boosted inflation by around 1.5% (ish) and this will automatically drop out next year. Not everything attracts VAT at the full rate so its not 2.5%. (I'm not sure of the exact figures but they can be found on the ONS website I think).

Stochasticity

philc27 wrote: »

Does anyone know if RPI includes the VAT rise? If so, the inflation rate next year will be significantly lower once that 2.5% has been removed from the equation.

The VAT rise took place in January 2011. The RPI relevant figures for the purposes of this investment are for a given five year period from March 2011 onwards only.

Stochasticity

Jonbvn wrote: »

I believe it includes the VAT rise.

However don't forget that many items are lower or zero VAT rated such as food and energy bills.

The VAT rise has no immediate impact. The only inflation that matters is inflation from March 2011 onwards. The vast majority of price changes as a result of increasing VAT will have already been priced in by that point.

oldvicar wrote: »

It does. The VAT rise has temporarily boosted inflation by around 1.5% (ish) and this will automatically drop out next year. Not everything attracts VAT at the full rate so its not 2.5%. (I'm not sure of the exact figures but they can be found on the ONS website I think).

It has temporarily boosted monthly inflation figures, correct. However, these are not what is used for the calculation of the index-linking, which is separate.

oldvicar

Stochasticity wrote: »

The VAT rise took place in January 2011. The RPI relevant figures for the purposes of this investment are for a given five year period from March 2011 onwards only.

I entirely agree.

But people commonly take a central assumption that inflation will continue at the 'current' rate.

Because of the VAT rises in both 2010 and 2011, reported headline rates since early last year have been temporarily boosted. Although VAT changes have a real effect on prices the 'underlying' rate without the VAT change would have been reported as around 3.8% rather than 5.3%. Thinking about it this way may help people ignore some of the over-hype about the returns which can be expected.

ztkr

Stochasticity wrote: »

The VAT rise took place in January 2011. The RPI relevant figures for the purposes of this investment are for a given five year period from March 2011 onwards only.

What I meant was that the present 5.3% RPI rate includes the VAT rise that took place in January. When that rise falls out of the equation come next year, RPI will be significantly lower - although of course, as some of the other posters stated, not every item that makes up the RPI has 20% VAT applied.

opinions4u

If you have a non-taxpayer in the house who's over 18, then the Birmingham Midshires 3 and 5 year options look a better bet, paying 0.75% or 1.50% above RPI.

Note the trade-off on access though.

lisyloo

Yes, you are correct to point out that published figures are YOY.
So (for example) if you compare prices in May 2010 and May 2011 then that compares some prices with VAT at 17.5% in May 2010 with prices in May 2011 with VAT at 2011, therefore the published rates are somewhat inflated.

I personally don't think this is a hugely significant factor when comparing RPI and savings accounts.

oldvicar

opinions4u wrote: »

If you have a non-taxpayer in the house who's over 18, then the Birmingham Midshires 3 and 5 year options look a better bet, paying 0.75% or 1.50% above RPI.

Note the trade-off on access though.

Maybe if you only want a 3 or 5 year investment, but it isn't normal for the banks to offer such products. I hardly pay any tax, but I still like the NS&I product for the long term simply because even when it was withdrawn from general sale last year my maturing certificates were allowed to be re-invested again. I realise they can change the rules at any time but I'm hoping this policy will continue. My core savings should then be 'safe' even when I'm too old and doppy to manage them properly!

MarkFromCornwall

philc27 wrote: »

When that rise falls out of the equation come next year, RPI will be significantly lower.

I don't think the retail prices index has ever fallen, although it could in theory. It just goes up more slowly sometimes.

Stochasticity

MarkFromMullion wrote: »

I don't think the retail prices index has ever fallen, although it could in theory. It just goes up more slowly sometimes.

It fell as recently as the year from October 2008 through October 2009.