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Can any UK savings account beat inflation?

UK inflation fell to 2.8% in July

UK inflation has fallen slightly following two consecutive increases, but it provides little respite for struggling savers as rates remain woefully low.

The consumer prices index (CPI), the standard measure for inflation showing how prices have changed over the last 12 months, fell to 2.8% in July, down from 2.9% in June, according to the Office for National Statistics (ONS).

Why has inflation fallen?

Decreases in the cost of clothing and footwear and cultural activities were the biggest contributing factors to the decline in CPI, while a rise in petrol and diesel prices partially offset the fall.

Meanwhile, the retail prices index (RPI) – the measure of inflation that includes mortgage interest payments – fell to 3.1%, down from 3.3% in June. 

How inflation erodes savings

With inflation at its current level, a basic-rate taxpayer would need to find a savings account paying 3.50% to beat CPI, and an account paying 3.88% to beat RPI.

Higher-rate taxpayers face an even bigger challenge – they would need an account paying 4.66% to beat CPI and 5.16% 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. 

Only one account can beat inflation

Unfortunately, of the 804 savings accounts on the market, including cash Isas, only one is able to beat inflation for basic-rate taxpayers. This is a seven-year fixed-rate bond from Skipton Building Society, which pays 3.5%. But in such a volatile market, you should think carefully before tying your money up for so long. 

A year ago, you could get a better rate by tying your money up for just two years, as the top two-year fixed-rate account in August 2012 paid 3.80%.

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