Can UK savings accounts beat inflation?Inflation rate fell to 2.0% in December 2013

14 January 2014

Inflation Dec 2013 piggy bank

Despite the slight fall in inflation in December 2013, savers are still struggling to get any meaningful returns on their cash.

The consumer price index (CPI) fell to 2% in December, down from 2.1% in November, according to the Office for National Statistics (ONS). CPI is the standard measure for inflation showing how prices have changed over the last 12 months.

Why the slight fall?

The ONS highlighted that the rise in prices of both food and non-alcoholic drinks was the smallest it had been since 2006. A slower rate of increase in prices of recreational goods, such as games and toys, also contributed to the slight fall.

These figures mean that CPI is at the government's target of 2.0%. This is the first time that the CPI has been at or below the target since November 2009, when the index stood at 1.9%.

The retail prices index (RPI), the measure of inflation that includes mortgage interest payments, actually rose to 2.7% in December. 

Rates needed to beat inflation

With inflation at its current level, a basic-rate taxpayer would need to find a savings account paying 2.50% to beat CPI, and an account paying 3.38% to beat RPI.

Higher-rate taxpayers face an even bigger challenge - they would need an account paying 3.33% to beat CPI and 4.50% to beat RPI.

As all interest earned within a cash Isa is free from tax, the rate you need to earn is the same as the headline inflation rate.

How rates currently stack up

You'll fail to get an instant access savings account that pays the desired 2.5% plus. In fact, the Tesco Bank Internet Saver at the top of the pile pays 1.55%, followed by a number of accounts offering 1.5% or 1.51%.

Cash Isa rates come near the desired rate of 2%, with NS&I, Stafford Railway BS and Virgin Money offering products paying 1.75%, but the net effect will still be that your savings will be eroded.

More on this...

  • Best rate savings accounts - track down the best deals in the market
  • Best rate Isa accounts - the most attractive tax-free deals around
  • Are my savings safe? - protection for your savings against mishaps