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What does the December CPI inflation rate fall mean for your savings?

Find out where you can get the best interest rates

What does the December CPI inflation rate fall mean for your savings?

Inflation fell slightly in December 2017, easing to 3.0%, according to the annual rate of Consumer Prices Index (CPI) figures released by the Office for National Statistics this morning.

Yet this figure remains well above previous January rates.

Which? explains what this means for your finances, and how you can protect the value of your savings.


How does this fit with the recent inflation trend?

This month’s figures signal a levelling off after several months of continuous increases – 3.1% last November, and 3% in October 2017.

But to put the recent trends into perspective, December 2016 inflation figures pointed to a 1.6% increase.

CPI measures the prices of roughly 700 everyday goods and services and records whether the prices rise or fall compared with what the goods cost in the same month of the previous year. The types of goods are given different proportional weightings.

Why has inflation fallen?

Air carriers are usually largely responsible for December inflation increases, as they up their prices ahead of Christmas and New Year.

But this year, air fares accounted for a smaller proportion of the ‘basket’ of everyday goods and services, so the rise in prices made less of an impact on the overall costs – leading to a downward push.

In addition to this, prices for recreation and culture also fell. Games and toys, as well as audio-visual products, saw steeper price decreases than they did in December 2016.

Some prices are still going up, however – particularly motor fuel and tobacco. The latter is due to the duty increases announced in the Autumn 2017 Budget.

What does inflation mean for your finances?

Put simply, the cost of goods and services have increased by 3% compared to the same month last year – so if you go on the same shopping trip as you did this time last year, you’ll be left with slightly less cash in your wallet.

While lower than previous months, an inflation rate of 3% is still high. If wages don’t rise in-line with inflation, everyone could still feel the pinch.

What’s more, this rate reduction is still not enough to benefit many people’s savings, unless your account offers interest at the same rate or above. This means the funds you’re saving could still lose value in real terms.

Can any savings accounts beat inflation?

At present, there are no traditional savings accounts or Isas offering rates high enough to beat current inflation rates, as you can see from the table below.

Several banks and building societies offer regular savers accounts with interest rates of 5%, but there are a few things to bear in mind.

Firstly, many state you must already hold another account with the provider before you can apply for a regular savers account.

Secondly, while the interest rate may look high, restrictions on deposits may may mean you’ll actually earn less than with a normal savings account.

Most regular savers accounts require you to drip-feed your savings over a certain period of time by limiting the amount you can deposit each month. This means you’ll earn little interest at the beginning due to only having a small amount of funds in the account. While this will increase over time, it’s not the same as consistently earning 5% interest on a large amount.

Get a return with a high interest current account

Sometimes, it pays more to hold your savings in a current account.

The Nationwide Flex Account offers 5% interest on balances up to £2,500 for the first 12 months (the rate then falls to 1%). At least £1,000 must be paid into the account each month to take advantage of the interest rate.

The next best offers come from TSB Plus Account and Tesco Bank Current Account, with 3% interest for each. TSB gives 3% interest on balances up to £1,500, as long as you pay in £500 a month and register for internet banking/paperless statements.

With Tesco you can earn 3% on balances up to £3,000, guaranteed until April 2019. All you have to do is pay in £750 a month and use the account to pay for three direct debits.

NS&I bonds can no longer beat inflation

Those who got in on the 4% Pensioner Bonds offered from National Savings & Investments (NS&I) between January and May in 2015 will have been enjoying an inflation-busting rate for some time now. But, these bonds are now maturing, so it’s time to look into what to do with your money.

If you do nothing, you’ll automatically be enrolled into the NS&I’s three-year Guaranteed Growth Bond, which is set at a much lower rate of 2.2% (but still beats most of the other savings options on the market). You’ll also be charged 90 days’ interest if you decide to take your funds out of the bond before the term expires.

For a slightly better return, the NS&I’s five-year Guaranteed Growth Bond offers 2.25% interest.

If you’re looking for higher wins for a higher risk, you could look to invest your savings.

While this has a chance of beating inflation over the long term, it’s not guaranteed, so you should be prepared that you might not get your money back.

If you’ve never invested before, see our five tips for new investors to get you started.

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