The Office for National Statistics revealed this morning that the February 2018 annual rate of Consumer Prices Index (CPI) inflation figures fell to 2.7%, down from 3.0% in January.
Which? explains what this could mean for your finances, and whether any savings accounts are in a better position to beat the current rate of inflation.
How does February 2018 inflation figure fit with the latest trend?
Inflation remained high in the latter half of 2017, peaking at 3.1% in November.
Rates have levelled out since then, falling to 3.0% in December, and remaining at 3.0% in January.
This month’s latest figures could indicate the beginning of a downward trend.
Inflation for February 2017 was 2.3%, and in February 2016 it was just 0.3%. Compared to these figures, 2018 is still seeing an increase in the price of common goods.
Why has inflation fallen?
The most significant factors in February’s inflation figure were transport costs – particularly motor fuels and sea fares – as average petrol prices did rise as much as they did a year ago.
The price of overnight hotel accommodation has fallen, whereas it was rising a year ago. It’s thought this may be down to the timing of Valentine’s Day.
Food and non alcoholic beverage prices also saw fewer price rises than last year, with the price of vegetables falling.
These downward effects were balanced out slightly by a rise in clothing and footwear prices.
What product prices is inflation based on?
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.
There have been some recent changes to the products included in the nation’s ‘shopping basket’ of goods – the total now stands at 714 items; 15 new this year, 14 removed and seven being modified.
To better represent the changing tastes and spending habits of people in the UK, the likes of pork pies, edam cheese and digital camcorders no longer feature in the basket. Women’s exercise leggings, action cameras, raspberries, quiche and prepared mashed potato, however, are all new additions.
CPI is used to increase benefits, such as the state pension and public sector pensions. But another measure of inflation – the Retail Prices Index – is often used to increase prices of contracts, such as broadband and mobile phones, and most private pensions, although the Office for National Statistics has doubts about its accuracy.
What does the inflation rate mean for your finances?
The inflation rate shows how much the price of popular goods and services has increased since the same time last year – so, if you were to go on the same shopping trip as you did a year ago, it would cost you more.
If wages don’t increase along with inflation rates, many people will feel more of a pinch when trying to buy the same items as they were last year.
However, a reduced rate is a step in the right direction, so you may find that goods are more affordable than a couple of months ago.
In terms of your savings, in order for your money to grow and not lose value in real terms, you’d need an account with an interest rate of 2.7% or more.
Can any savings accounts beat inflation?
Currently, there are no savings accounts that can beat the current rate of inflation. See the table below for the highest rates of each type of savings and Isa account.
- Find out more: How to find the best savings account
Is there any other way to help your savings beat inflation?
One option to help your savings grow is to pay them into a high interest current account, which is a great option if you always stay in credit.
The Nationwide FlexDirect account offers the highest rate of 5% AER on balances up to £2,500 for the first 12 months – after that, the rate falls to 1%. You need to make sure at least £1,000 is paid in each month.
The TSB Plus account offers 3% AER on balances up to £1,500, with a minimum of £500 being paid in each month and on the condition that you register for internet banking and paperless statements. You can also get up to £10 cashback a month if you set up two direct debits and spend on the TSB debit card 20 times a month.
Tesco Bank current account also offers 3%, on balances up to £3,000 – as long as you pay in £750 a month and pay out three direct debits from the account. You can also earn one Clubcard point per £1 spent on the debit card at Tesco, in addition to normal Clubcard points.