Which? reveals the accounts that beat inflationInflation tumbles to 3.6%

14 February 2012

Inflation falls, saving still hard

Inflation is down but savings rates are still struggling to keep up with it

A second consecutive monthly fall of 0.6% to the UK consumer price index provides hope that savings accounts could finally return to paying inflation-beating interest in the near future.

The consumer price index (CPI), the standard measure of inflation, fell to 3.6% in January 2012, while the retail price index (RPI), which includes mortgage interest payments, dropped from 4.8% to 3.9%.

The savings accounts that beat inflation

The Bank of England's target for inflation is 2% and current levels, though moving in the right direction, continue to make life difficult for savers.

As a basic rate taxpayer you would currently need to be earning 4.5% interest just to match CPI, as the 20% tax payable would reduce your gains to 3.6%. For a higher rate tax payer, 6% interest would be needed to break even once inflation is taken into account.

Savings accounts

For basic-rate taxpayers, there are six Best Rate savings accounts that beat CPI, with Birmingham Midshires topping the table with an account paying 4.65%. 

However, these are five-year fixed-rate accounts, and require you to tie up your money for the long-term. You risk missing out on better rates if the Bank of England base rate (currently at 0.5%) increases over the next five years. 

Cash Isas

However, saving through a Cash Isa means you don't pay any tax on interest. There are three 2-year fixed-rate cash Isas that are beating CPI, the best of which is the Governor Money Progressive account, paying 3.75%. 

This will allow you to tie your money up over the short-term and then switch to a better account if interest rates increase. 

The Governor Money Saffron BBS 3-year fixed-rate Isa is paying 4% - beating the higher RPI inflation level of 3.9%.

Why inflation fell in January 2012

The increase in the standard price of value added tax (VAT) from 17.5% to 20% in January 2011 played a big part in the latest fall.

In 2011, the VAT rise caused a spike to inflation, which is significant now because CPI and RPI annual inflation figures are calculated by comparing price changes in the latest two months against the same period a year earlier.

Financial services cost up

Sectors that also contributed to the lower inflation rate include fuels and lubricants, restaurants and cafes, tobacco, vehicle maintenance and repair, new vehicles and alcoholic drinks.

The cost of financial services, clothing & footwear, air transport and recording media all rose by more between December 2010 and January 2011 than they did a year earlier.  

Of more concern to most people will be the fact that the cost of vital goods have risen significantly between January 2011 and January 2012. Housing and household services are up 7.4%, communication 4.9% and transport 4%.

More on this…