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Inflation jumped in January 2020: what does this mean for your savings?

Find out whether the best savings rates can exceed the current rate of CPI inflation

Inflation jumped in January 2020: what does this mean for your savings?

Inflation rose to 1.8% in January 2020, according to the latest figures from the Office for National Statistics (ONS).

The Consumer Prices Index (CPI) inflation is up from 1.3% in December 2019, thanks in part to rising prices at the pumps and other transport costs. This 0.5% rise is the steepest monthly increase since February 2017.

Here, we explain why inflation has risen and where you can find the best savings rates to match or exceed it right now.


Why has inflation jumped?

The main factors that have caused the inflation increase include price rises across many transport services, including petrol and diesel, as well as air fares. Clothing and footwear prices also increased, particularly among women’s clothing. In addition, prices for restaurants and hotels have also been on the up.

The graph below shows how CPI inflation has varied since January 2015, using figures from the ONS.

The Bank of England is tasked with trying to keep inflation as near to 2% as possible. However, the inflation rate has been below this benchmark since August 2019.

CPI inflation peaked at 3.1% in November 2017, and at the time no savings account paid a rate that could equal or beat it.

Best savings rates that beat January inflation

The table below sets out the best savings and Isa interest rates currently available for fixed-term and instant-access accounts.

The links take you through to more details at Which? Money Compare, where available.

Account type Account Interest rate (AER) Terms Does this account equal or beat January 2020 inflation?
Five-year fixed-rate savings account Gatehouse Bank Five- Year Fixed-Term Deposit 2.1% (EPR*) £1,000 minimum initial deposit Yes
Five-year fixed-rate cash Isa Principality Building Society Five-Year Fixed-Rate Cash Isa 1.7% £500 minimum initial deposit No
Four-year fixed-rate savings account Punjab National Bank 4 Year Fixed Term Deposit 2% £100 minimum initial deposit Yes
Four-year fixed-rate cash Isa United Trust Bank Cash Isa Four-Year Bond 1.65% £15,000 minimum initial deposit No
Three-year fixed-rate savings account Bank of London & The Middle East Three-Year Premier Deposit Account 1.85% (EPR*) £1,000 minimum initial deposit Yes
Three-year fixed-rate cash Isa Aldermore Three-Year Fixed-Rate Cash Isa 1.55% £1,000 minimum initial deposit No
Two-year fixed-rate savings account Atom Bank Two-Year Fixed Saver 1.8% £50 minimum initial deposit Yes
Two-year fixed-rate cash Isa Al Rayan Bank 24- Month Fixed-Term Cash Deposit Isa 1.5% (EPR*) £1,000 minimum initial deposit No
One-year fixed-rate savings account Atom Bank One-Year Fixed Saver 1.65% £50 minimum initial deposit No
One-year fixed-rate cash Isa OakNorth Bank 12-Month Fixed-Rate Cash Isa 1.41% £1 minimum initial deposit No
Instant-access savings account Post Office Online Saver 1.32% £1 minimum initial deposit No
Instant-access cash Isa Al Rayan Bank Instant-Access Cash Isa 1.35% (EPR*) £50 minimum initial deposit No

*Expected profit rate. Source: Moneyfacts. Correct as of 18 February 2020; rates subject to change.

Just four accounts in our table can beat the current rate of inflation, but require locking your cash away for at least two years in a fixed-term account.

However, before committing to one of these, you should consider whether you can definitely do without that money for the full term. That’s because rates could increase while your funds are locked up.

Several 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 – but, at the time of writing, we’ve not heard of an instance in the UK where an advertised EPR hasn’t been paid.

What’s happening to savings rates?

While it’s positive that savers can find accounts with rates that equal or beat inflation, this is only because inflation has been particularly low for the past few months.

Savings rates themselves have been continually dropping across the board for the past year – and that’s across both cash Isas and savings accounts, and for instant-access and fixed-rate terms.

The table below shows how average rates have changed across instant-access, one-year fixed and longer-term fixed cash Isas and savings accounts, using data from Moneyfacts. Longer-term accounts include any fixed-terms for longer than 550 days.

Account type Feb 2019 July 2019 Jan 2020 Feb 2020
Average instant-access cash Isa 0.96% 0.96% 0.85% 0.83%
Average instant-access savings account 0.64% 0.62% 0.59% 0.56%
Average one-year cash Isa 1.37% 1.32% 1.15% 1.12%
Average one-year savings account 1.46% 1.41% 1.2% 1.17%
Average longer-term cash Isa 1.6% 1.55% 1.37% 1.34%
Average longer-term savings account 1.85% 1.78% 1.48% 1.43%

Source: Moneyfacts.

As the table shows, fixed-term accounts have seen the biggest decline – particularly longer-term savings accounts, where average rates have reduced 0.42% in a year.

The rate reduction also seems to have sped up between January and February of this year; in one month alone, longer-term savings rates have fallen 0.05%, and instant-access savings, one-year fixed cash Isas, one-year fixed savings accounts and longer-term cash Isas have all fallen by 0.03%.

Just this morning, the popular Marcus by Goldman Sachs account cut its rate from 1.35% to 1.3% AER – fitting with the current trend.

Further cuts to come

It seems this isn’t the end of the pain for savers, as a raft of recent announcements suggest that returns are going to get squeezed even further from May 2020.

The first comes from National Savings & Investments (NS&I), which revealed it will be cutting the rates on its variable and fixed-rate savings products from 1 May 2020.

Rates are being reduced between 0.15%-0.45%, with the worst-affected account being the NS&I Income Bonds, being reduced from 1.16% AER to 0.7% AER.

Other accounts affected include the NS&I Direct Saver, Investment Account, Guaranteed Growth Bonds, Guaranteed Income Bonds and Fixed Interest Savings Certificates.

And then there are high-interest current accounts.

Santander recently announced several changes affecting its 123, Select and Private current accounts that will reduce the returns customers can get on their cash. From 5 May, not only will the accounts’ interest rate be cut to 1% from 1.5% AER, but the cashback that customers had been able to earn from paying their household bills from the account will be capped at £5.

In addition, TSB’s popular Classic Plus current account will see its 3% interest rate halved to 1.5% AER from 2 May. This is paid on balances up to £1,500 and requires a minimum funding of £500 per month and customers to opt for internet banking/paperless statements.

How does CPI inflation affect your savings?

CPI inflation tracks the prices of around 700 popular goods and services, from avocados to air fares – all held in an imaginary shopping basket.

The figure released each month shows how the price of everything in the basket has collectively changed in comparison to what it cost in the same month of the previous year. So, if you had bought all of the goods and services in January 2020, you’d have paid 1.8% more than in January 2019.

This affects the buying power of money held in a savings account. If your interest rate doesn’t equal or exceed the rate of inflation, your savings will effectively lose value over time. As prices rise, this means you’ll be able to buy fewer things with the same amount of cash.

That’s why it’s important to make sure your money is held in an account that can stay in line or ahead of the rate of inflation.

Save with a Which? Recommended Provider

You can search through hundreds of cash Isas and savings accounts with Which? Money Compare.

The comparison site details the interest and terms of an account, as well as how it rated in our unique savings survey, and it also lists those accounts that have been named a Which? Recommended Provider.

Which? Recommended Providers are companies that have both been rated highly by customers and offer products that meet the exacting standards of our expert researchers.

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.

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