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Inflation fell to 2.1% in December 2018 – can any savings rate beat it?

Where to find the best savings rates to combat inflation

The UK Consumer Price Index (CPI) measure of inflation fell to 2.1% in December 2018, the Office for National Statistics (ONS) announced this morning.

This is down from 2.3% in November, and is the lowest rate since January 2017.

If your savings are earning less interest than the rate of inflation, your cash will be losing value in real terms.

Which? reveals why inflation has decreased, and where you can find savings accounts to beat it.


Why has inflation fallen?

CPI inflation tracks the cost of an imaginary ‘shopping basket’ of more than 400 goods and services, including flights and fuel, meat, alcohol and even gym leggings.

Each month’s inflation rate indicates how the price has changed, comparing how much it would cost to buy everything in the basket now to how much it would have cost at the same time the previous year.

The main factors influencing December’s inflation figure were slower growth in petrol prices and air fares, where prices didn’t rise as much as they did a year ago.

This was balanced by price rises from restaurants and hotels, particularly package holidays and catering services.

The graph below shows how CPI inflation has changed since November 2013, peaking at 3.1% in November 2017.

The Bank of England is responsible for trying to keep inflation as close to 2% as possible, in order to keep prices rising at roughly the same rate as average wage growth. It adjusts the base rate to help move inflation towards 2%.

In theory, increasing the base rate will push up the rates of mortgages and personal loans, and boost savings rates.

This encourages consumers to spend less, as they’re forced to repay more and are rewarded for saving. The reduced demand will then force providers of goods and services to bring prices down.

If inflation drops too low, the base rate can be reduced to bring about the opposite effect.

The base rate was last increased in August 2018. December’s 2.1% rate is the closest inflation has come to 2% since January 2017.

Find out more: Bank of England base rate and your mortgage

How does inflation affect savings?

If your savings are in an account that doesn’t match or beat the rate of inflation, your cash will lose value in real terms.

As goods and services become more expensive, you won’t be able to buy as much with the same amount of money.

So, if your savings account pays less than 2.1% you might want to consider switching.

Currently, only fixed-rate savings accounts can beat the rate of inflation.

Can any savings accounts beat inflation?

The table below shows the top-rate fixed-term and instant-access savings accounts and cash Isas.

There are six top-rate accounts that can beat the current rate of inflation.

The links take you through to Which? Money Compare.

Account type Account AER Terms
Five-year fixed-rate savings account Atom Bank five-year fixed saver 2.70% £50 minimum initial deposit
Five-year fixed-rate cash Isa Charter Savings Bank five-year fixed-rate cash Isa 2.26% £1,000 minimum initial deposit
Four-year fixed-rate savings account Union Bank of India four-year fixed-rate deposit 2.50% £1,000 minimum initial deposit
Four-year fixed-rate cash Isa Sainsbury’s Bank four-year fixed-rate cash Isa 1.80% £5,000 minimum initial deposit
Three-year fixed-rate savings account Al Rayan Bank 36-month fixed-term deposit 2.52% (EPR*) £1,000 minimum initial deposit
Three-year fixed-rate cash Isa Aldermore three-year fixed-rate cash Isa 2.05% £1,000 minimum initial deposit
Two-year fixed-rate savings account Investec Bank plc two-year fixed-term deposit 2.35% £25,000 minimum initial deposit
Two-year fixed-rate cash Isa Aldermore two-year fixed-rate cash Isa 1.85% £1,000 minimum initial deposit
One-year fixed-rate savings account Gatehouse Bank one-year fixed-term deposit (Raisin Issue) 2.10% (EPR*) £1,000 minimum initial deposit
One-year fixed-rate cash Isa Aldermore one-year fixed-rate cash Isa 1.70% £1,000 minimum initial deposit
Instant-access savings account West Brom Building Society Direct Double Access 1.5% £1,000 minimum initial deposit. Interest rate penalty for more than two withdrawals per year
Instant access cash Isa Virgin Money Double Take E-Isa 1.45% £1 minimum initial deposit. Two withdrawals permitted per year.

*Expected Profit Rate. Source: Which? Money Compare, correct 15 January 2019

Should you get a fixed-rate savings account?

While it’s still unclear what to expect after Brexit, there could be effects on the housing industry, savings rates and other parts of the financial sector.

With this in mind, it could be tempting to lock in to a fixed-rate savings account now in case rates drop in future.

Moving your money to the Atom Bank five-year fixed saver, for instance, would mean inflation could increase by 0.6% before your savings would no longer be beating it, and you would not have to think about switching again until 2024 – when hopefully any Brexit-related changes will have settled down.

However, there is no guarantee inflation will not rise past 2.7% – keeping in mind it was at 3.1% just over a year ago. If it stays there, your money will be losing value and you’ll have no option to move it.

Instead, you could consider a shorter term fixed-rate account. This could allow you to lock in a competitive rate for a year or two, but then reassess the market and move your money elsewhere sooner.

Rate cuts on the horizon

Savers with Coventry Building Society will soon see their savings rates slashed.

From 1 February, rates on the Branch Instant Isa, Easy Access Isa and Poppy Isa – all of which are closed to new customers – will be reduced to 1.15% AER.

All products will be reduced from 1.25% AER to 1.15% – you could get 0.30% more if you were to switch to Virgin Money’s top-rate instant-access cash Isa.

But, on the plus side, 1.15% is still above the average instant-access cash Isa rate – which, according to Moneyfacts, is 0.94% for this month.

Why are the changes taking place? Coventry Building Society says it’s necessary in order to keep its mortgage rates competitively low.

If your savings are in a Coventry Building Society account with withdrawal restrictions, and the rate is reduced, you have until 28 February to close your account without notice or charge and switch elsewhere.

Changes such as this aren’t the case across the board, as many banks are still bidding for the top-rate position, but could be an indication of things to come if providers start to feel the pinch on mortgage lending.

It’s also worth noting that Coventry Building Society has also put up the rates on its one-, two-, three- and four-year fixed-term cash Isas by at least 0.15% AER. The biggest raise is on the one-year fixed-rate Isa, which is increasing 0.3%, from 1.4% to 1.7%.

Save with a Which? Recommended Provider

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Instant-access accounts

If you know you’ll want to access your cash, RCI Bank’s Freedom Savings Account pays 1.42% AER, requiring a £100 minimum initial deposit.

Elsewhere, Skipton Building Society’s eSaver Issue 9 account can be opened for £1, and offers an AER of 1.15%.

Fixed-rate accounts

If you can lock your savings away for at least a year, you might be able to find a higher rate.

RCI Bank’s one-year fixed-term account pays 1.71% AER, and requires a minimum initial deposit of £1,000. It’s three-year fixed-term account offers 2.36% AER.

You could also consider Leeds Building Society’s four-year income bond, which pays 1.92% and requires at least £100 to open it.

Editor’s note: This article previously stated that the Coventry Building Society five-year fixed-rate Centenary Poppy Isa rate was being reduced from 2.10% to 1.15% – it is in fact the Easy Access Poppy Isa rate that will be reduced to 1.15%.

Please note that the information in the table(s) above is for information purposes only and does not constitute advice. Please refer to the particular terms and conditions of the savings account provider before committing to any financial products.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

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