UK inflation as measured by the Consumer Prices Index (CPI) fell to 1.5% in October 2019 – a three-year low, according to official figures.
The Office for National Statistics (ONS) says the energy price cap and a fall in the cost of furniture have contributed to inflation falling to its lowest level since November 2016.
Here we explain why inflation has changed and where to find the best savings rates that can beat it.
Why has inflation fallen?
The energy price cap helped ease inflation in October, partially offset by a rise in the cost of clothing and footwear.
Ofgem introduced the price cap in January 2019 to stop energy companies exploiting loyal customers who don’t switch to cheaper deals. It limits the cost of standard variable tariffs, which households are automatically moved onto once their introductory deal is over.
The limit was lowered by £75 in October, which meant the average annual energy bill for a household fell from £1,254 to £1,179 for 11 million customers.
The graph below shows how CPI inflation has changed since August 2016, using figures from the ONS.
The Bank of England is tasked with keeping inflation as near to 2% as possible. So far in 2019, it has managed to keep fairly close to this benchmark.
Inflation peaked at 3.1% in November 2017, and at the time no savings account paid a rate that could beat it. The situation is much better for savers now, with inflation at its lowest level since November 2016 when it was 1.2%.
Best savings rates to beat October CPI inflation
The table below sets out the top-rate cash Isas and savings accounts ordered by length of term and then by interest rate. All the links take you through to our comparison site, Which? Money Compare.
|Account type||Savings account||Interest rate (AER)||Minimum initial deposit||Terms (if applicable)||Does this account beat October 2019 inflation?|
|Five-year fixed-rate savings account||United Bank UK Five-Year Fixed-Term Deposit||2.36%||£2,000||Early closure attracts a penalty of 365 days’ gross interest.||Yes|
|Five-year fixed-rate cash Isa||United Bank UK Five-Year Fixed-Rate Cash Isa||2.01%||£22,000||Isa transfers allowed. Early withdrawal subject to loss of 365 days’ gross interest.||Yes|
|Four-year fixed-rate savings account||Bank of London & the Middle East Four-Year Premier Deposit Account||2.10% (EPR*)||£1,000||No withdrawals before the end of the fixed term.||Yes|
|Four-year fixed-rate cash Isa||United Trust Cash Isa Four-Year Bond||1.75%||£15,000||Transfers in only. Early withdrawals subject to a penalty.||Yes|
|Three-year fixed-rate savings account||Al Rayan Bank 36-Month Fixed-Term Deposit||2.32% (EPR*)||£1,000||No withdrawals before the end of the fixed term.||Yes|
|Three-year fixed-rate cash Isa||State Bank of India three-Year Cash Isa Fixed Deposit||1.90%||£5,000||Isa transfers allowed. You need to have another product with the same provider to take out this account.||Yes|
|Two-year fixed-rate savings account||Al Rayan Bank 24-Month Fixed-Term Deposit||2.17% (EPR*)||£1,000||No withdrawals before the end of the fixed term.||Yes|
|Two-year fixed-rate cash Isa||Al Rayan Bank 24-Month Fixed-Term Deposit Cash Isa||1.80% (EPR*)||£1,000||Isa transfers allowed. No withdrawals before the end of the fixed term.||Yes|
|One-year fixed-rate savings account||Al Rayan Bank 12-Month Fixed-Term Deposit||1.86% (EPR*)||£1,000||No withdrawals before the end of the fixed term.||Yes|
|One-year fixed-rate cash Isa||Al Rayan Bank 12-Month Fixed-Term Deposit Cash Isa||1.60% (EPR*)||£1,000||Isa transfers allowed. No withdrawals before the end of the fixed term.||Yes|
|Instant-access savings account||Coventry Building Society Triple Access Saver||1.46%||£1||The rate includes a 0.31% bonus for 12 months so your rate will drop to 1.15% after a year. The account allows only three penalty-free withdrawals a year.||No|
|Instant-access cash Isa||Virgin Money Double Take E-Isa Issue 12||1.36%||£1||Isa transfers allowed. The account allows only two penalty-free withdrawals a year.||No|
*Expected Profit Rate. Source: Which? Money Compare. Correct as of 13 November 2019.
To beat the current rate of inflation, you’d need to lock up your money for at least one year in a fixed-term savings account or cash Isa.
Longer-term savings are paying much more than inflation at the moment but there’s always a chance that interest rates will improve while your money is locked away, meaning you won’t be able to take advantage of better deals or will have to pay a penalty to access your cash before the end of the fixed term.
Many of the top deals are from Sharia-compliant providers. These firms offer an expected profit rate (EPR) rather than an annual equivalent rate (AER). The rate is not guaranteed and could be adjusted at any time – although, at the time of writing, we have not heard of an instance where an advertised EPR has not been paid.
- Find out more: Islamic finance and Sharia-compliant savings explained
How does CPI impact your savings?
The CPI measure of inflation tracks the prices of around 700 goods and services, from flights to subscriptions, held in an imaginary basket.
Each month the ONS calculates the changes and reveals a figure that represents how the price of everything has changed compared to the same period last year.
So if you bought all the goods and services in October this year, you’d have paid 1.5% more than in October 2018.
The change has a big impact on the money you won’t use straight away, namely your savings. If the rate your savings are growing by does not meet or exceed inflation they will effectively lose purchasing power – you won’t be able to buy as much with the same amount in the future.
So it’s important to monitor the rate your savings are earning and how inflation is changing from month to month.
Save with a Which? Recommended Provider
You can search hundreds of cash Isa and savings accounts with Which? Money Compare. This details the interest and terms of an account as well as how it rated in our unique savings survey, and lists those accounts that achieved Which? Recommended Provider status.
Which? Recommended Providers are companies that have been rated highly by customers and offer products that meet the exacting standards of our expert researchers.
Find out more: the best and worst savings providers
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? Money Compare is a trading name of Which? Financial Services Limited.
Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms & conditions of a provider before committing to any financial products.