Inflation rise means savers must beware Many accounts offer no ‘real’ return on investment

18 November 2009

Savers are being urged to check the interest rates payable on their accounts after figures from the Office for National Statistics revealed that CPI inflation rose to 1.5% in October.

The government’s preferred index of inflation, the Consumer Prices Index (CPI), measures the speed at which the price of goods is rising. Last month, it increased from 1.1% in September.

The Retail Prices Index (RPI) also rose from -1.4% to -0.8% between September and October - the biggest month-on-month rise for 19 years.

Inflation matters to savers because it affects the real value, or ‘purchasing power’, of the money they’ve put aside.

Savings accounts and inflation

If the return an individual earns in their savings account after tax is lower than the rate of inflation, this means their money is losing value in real terms in each year.

Effectively, after a year they would be able to buy fewer items with the money they’d saved than they could have done 12 months before.

By leaving your money in a low-rate savings account, it is therefore possible to diminish, rather than increase, the ‘real’ value of your cash.

Moneynet, the personal finance website, says basic rate taxpayers must now invest in savings accounts that pay at least 1.875% AER if they are to beat inflation. Meanwhile, higher rate taxpayers need to earn 2.5% AER on their money in order to maintain its purchasing power.

Best savings rates

According to Moneynet’s data, only one in five of the market’s variable rate savings accounts currently offers an interest rate high enough to help basic rate taxpayers beat inflation. Only around one in 10 accounts come with rates above the level required by higher rate taxpayers.

Which? Money Editor James Daley said: ‘While CPI is still below the Bank of England’s target of 2%, the fact that it is now outstripping the rates payable on many savings accounts means many consumers are losing money in real terms.

‘It is important to regularly check that you’re getting a market-leading rate on your savings in order to make the most of your money. It is also crucial to be mindful of inflation, which over time can erode the real value of the cash you put aside.’

To find a competitive savings account, check out our independently reviewed Which? Best Buys. If you’re interested in fixing your savings rate, take a look at our fixed rate savings account review; it contains details of our Best Buy one year bonds as well as a clever account finder that could help you hunt down a medium- or long-term deal.

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