Inflation fell sharply to 0.2% in August 2020, according to the latest figures from the Office for National Statistics (ONS) – partly due to falling prices in restaurants and cafés due to the government’s Eat Out to Help Out scheme.
The Consumer Prices Index (CPI) measure of inflation is down from 1% in July – it had previously been below 1% between April and June due to the effects of the coronavirus pandemic.
Here, Which? reveals why the CPI inflation rate has changed, plus where you can find the best rates for savings accounts and cash Isas.
Why has inflation fallen?
One of the main factors behind the August 2020 inflation decrease are hugely reduced prices in cafés and restaurants, due to the Eat Out to Help Out scheme, which gave customers up to 50% off food and soft drinks from Monday to Wednesday throughout the month.
There were also downward contributions from reduced prices for airfares and motor fuels, clothing and footwear, and miscellaneous items that include jewellery, clocks and watches.
The graph below shows how the rate of CPI inflation has varied since January 2015, using figures from the ONS.
The Bank of England has been tasked with keeping inflation as near to 2% as possible. However, it’s measured below that rate since August 2019 and dipped below 1% in April 2020 for a few months due to the effects of the coronavirus crisis.
Best savings rates that match or beat August inflation
The table below sets out the top interest rates for fixed-term and instant-access cash Isas and savings accounts, by order of term.
The links take you through to Which? Money Compare, where available:
|Account type||Account||AER (or EPR where stated)||Terms||Does this account match or beat August 2020 inflation?|
|Five-year fixed-term savings account||UBL UK Five-Year Fixed Term Deposit||1.5%||£2,000 minimum initial deposit||Yes|
|Five-year fixed-term cash Isa||UBL UK Five-Year Fixed Rate Cash Isa||1.4%||£2,000 minimum initial deposit||Yes|
|Four-year fixed-term savings account||Bank of London & The Middle East Four-Year Premier Deposit Account||1.35% (EPR*)||£1,000 minimum initial deposit||Yes|
|Four-year fixed-term cash Isa||Punjab National Bank Four-Year Fixed Rate Cash Isa||1%||£1,000 minimum initial deposit||Yes|
|Three-year fixed-term savings account||UBL UK Three-Year Fixed Term Deposit||1.4%||£2,000 minimum initial deposit||Yes|
|Three-year fixed-term cash Isa||UBL UK Three-Year Fixed Rate Cash Isa||1.1%||£2,000 minimum initial deposit||Yes|
|Two-year fixed-term savings account||Charter Savings Bank Two-Year Fixed Rate Bond||1.31%||£5,000 minimum initial deposit||Yes|
|Two-year fixed-term cash Isa||Hampshire Trust Bank Two-Year Isa Bond||0.95%||£1 minimum initial deposit||Yes|
|One-year fixed-term savings account||Aldermore One-Year Fixed Rate Account||1.2%||£1,000 minimum initial deposit||Yes|
|One-year fixed-term cash Isa||Hampshire Trust Bank One-Year Isa Bond||0.9%||£1 minimum initial deposit||Yes|
|Instant-access savings account||Skipton Building Society Online Bonus Saver||1.2%||Includes a bonus rate of 0.5% for the first 12 months. £1 minimum initial deposit||Yes|
|Instant-access cash Isa||Coventry Building Society Triple Access Isa(Online)||0.96%||Three withdrawals allowed each year; any more receive a 50-day interest charge on the amount being withdrawn. £1 minimum initial deposit||Yes|
*Expected profit rate. Source: Moneyfacts. Correct on 15 September 2020, but rates are subject to change.
All of the accounts in our table currently exceed August 2020’s rate of inflation.
Note that some of these accounts come with restrictions. Coventry Building Society’s Triple Access Isa (Online) only allows you to make up to three free withdrawals per year (the year starts when you open the account). Any withdrawals made after that will incur a charge equal to 50 days’ interest on the amount you’re taking out – so if you know you’re likely to need to access your money frequently, this may not be the best option for you.
Skipton Building Society’s instant-access account comes with a bonus rate of 0.5% AER for the first 12 months. This means the interest rate will drop to 0.7% AER after the first year, at which point you might want to consider switching if you can get a better rate elsewhere.
The account from Bank of London & The Middle East is an Islamic bank. As the accounts are Sharia-compliant, they offer an expected proﬁt rate (EPR) rather than an annual equivalent rate (AER). This means the advertised rate is not guaranteed, but we’ve never heard of an instance where an Islamic bank has not delivered on its EPR in the UK.
Signs of life in savings rates?
Average savings rates have been falling for some time – even before the effects of coronavirus hit the market. But between August and September, some average rates have remained the same and even increased slightly – in some cases, for the first time since summer 2019.
Average instant-access rates for savings accounts and cash Isas are the same, but fixed-term accounts have crept up. The average rate for long-term fixed-rate cash Isas (that is, those with a fixed term of 18 months or more) have increased to 0.78% from 0.75% in August. Average rates for long-term savings accounts, one-year fixed-term savings accounts and one-year fixed-term cash Isas are all up 0.02%.
It’s not a lot, and rates are still low compared with where they were at the beginning of the year, but it could be a sign of improvement in the months to come.
Could you get a savings windfall?
An alternative way to get a return on your savings is to use an account that offers a prize draw.
The most popular option is premium bonds, offered by National Savings & Investments (NS&I). Last month saw almost 4m prizes given out – with values between £25 and £1m – but your odds of winning are a slim 1 in 24,500.
However, Family Building Society offers another option with its Windfall Bond. As of 1 October, it’s increasing the number of prizes that can be won each month, which range from £1,000 to £50,000, and your odds of winning are 1 in 714. However, each bond requires at least £10,000, which is out of reach for a lot of savers.
If you don’t win a Windfall Bond prize, savings will still receive interest – albeit a very low rate of 0.1% AER. In contrast, money held in premium bonds does not receive any interest – so, if you don’t win, your savings will effectively be eroded by the effects of inflation. See how this works below.
- Find out more: how to find the best savings account
How does CPI inflation affect your savings?
CPI inflation tracks the cost of a ‘basket’ containing around 700 popular goods and services – from train fares to toys and games.
The figure that’s released each month shows how much prices have changed in comparison with the same month the year before.
So, if you bought all of the items in the basket in August 2019 and bought them all again in August 2020, your second shopping trip would have been 0.2% more expensive.
Over time, these price changes can affect the buying power of money held in savings accounts. If the cash isn’t growing in interest at the same rate as inflation or more, it will effectively lose value, as you’ll be able to buy less with it.
That’s why it’s important to make sure your money is making as competitive a return as possible – even when rates are low.
Save with a Which? Recommended Provider
You can search through hundreds of savings accounts and cash Isas with Which? Money Compare.
The comparison site details the interest rate and terms of an account, as well as how it rated in our unique savings survey. It also lists the 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.