Inflation fell to its lowest level for two-and-a-half years in May, with the consumer prices index now at 2.8%, down from 3% in April 2012.
The slowing price of energy, food, fuel and commodity were the main contributors to the decrease in annual inflation, rising less than they did at the same stage in 2011. The fall in the rate of inflation was unexpected – experts thought it would remain stable in May.
Air and sea fares are cited as the biggest reasons for this drop. Air fares rose 1.4% in May compared with an 11.1% drop at the same time last year, while sea ticket prices rose by 2.6%, compared with a drop of 14.7% last May. But the timing of Easter this year and its impact on the timing of school holidays is partly to blame for these increases.
Inflation still above target
The consumer price index (CPI), the standard measure of inflation, has been well above the Bank of England’s target of 2% since November 2009. This is the first time it has fallen below 3% since December 2009. This fall in CPI means more quantitative easing is likely.
The retail price index (RPI) fell to 3.1% in April, down from 3.5% in March.
Cash Isas beating inflation
With CPI down to 2.8% it is now possible to earn real returns on instant access cash Isas, bringing some welcome relief to savers. You can invest up to £5,640 in a cash Isa in 2012-2013, tax-free.
Our Best Rate Isa tables show four instant access Isa accounts currently delivering interest above inflation, with Cheshire Building Society’s Direct Cash Isa topping the list, paying 3.35%. Santander’s Direct Isa is hot on its heels, paying 3.30%.
If you’re willing to lock up your money for a longer period then you can get 4% interest on Santander’s Super Direct two-year fixed rate Isa.
Savings accounts that beat inflation
Although it remains hard to beat inflation through a standard savings account once tax has been accounted for, it is easier than it was in April.
- Basic rate taxpayers would need to receive at least 3.5% interest to make real returns this month compared with 3.8% last month
- Higher rate taxpayers would require 4.7% to match inflation, less than the 5% needed last month.
The drop in inflation means there are more standard savings accounts that you can use to beat inflation – 210 in May compared with 159 in April.
The best paying instant access savings account, offered by Santander, pays 3.20%. The best of the one-year fixed-rate savings accounts is currently Clydesdale Bank’s, paying 3.50%.
Several providers currently have three-year fixed rate savings accounts providing inflation-beating returns, including Secure Trust Bank and Clydesdale Bank, as well as Close Brothers’ and BM Savings’ table-topping accounts that pay 4%.