Inflation rose to 2.5% in June 2021, according to the latest figures from the Office for National Statistics (ONS) – partly due to price rises for food, second-hand cars, clothing and footwear, and eating and drinking out.
The Consumer Prices Index (CPI) measure of inflation is up from 2.1% in May 2021.
CPI inflation tracks the costs of a ‘shopping basket’ containing around 700 popular goods and services.
Here, Which? reveals why the inflation rate has changed, and how it compares with the top-rate savings accounts and cash Isas currently on the market.
Why has inflation risen?
The main factors that caused June’s inflation rise were prices rises for fuel and second-hand cars. Prices for second-hand cars rose between May and June this year due to an increasing demand following the lifting of national lockdown measures, whereas in previous years prices have fallen around this time.
Prices for food and non-alcoholic drinks have also risen, particularly for bread and cereals. Again, prices for these items fell at the same time last year, which is why there’s such a marked difference.
There has been an increase in people buying meals and drinks from restaurants and cafés between May and June. Many of these items were unavailable at the same time last year.
Finally, prices for clothing and footwear have also risen. Usually, prices fall between May and June as the summer sales begin, but the usual patterns have been altered by the various lockdowns since the start of the pandemic.
The graph below shows how CPI inflation has fared since June 2017, using data from the ONS.
The Bank of England has been tasked with keeping inflation as close to 2% as possible. May 2021 was the first time it’s exceeded this target since July 2019. Inflation had measured at 1.5% or less from March 2020 to April 2021 due to the economic effects of the pandemic.
Best savings rates
The table below sets out the top rates for fixed-term and restriction-free savings accounts and cash Isas, by order of term.
|Account type||Account||AER||Terms||Does this account equal or beat June inflation?|
|Five-year fixed-term savings account||United Bank UK Five-Year Fixed-Term Deposit||1.66%||£2,000 minimum initial deposit.||No|
|Five-year fixed-term cash Isa||United Bank UK Five-Year Fixed-Term Cash Isa||1.31%||£2,000 minimum initial deposit.||No|
|Four-year fixed-term savings account||JN Bank Four-Year Fixed-Term Savings Account||1.45%||£1,000 minimum initial deposit.||No|
|Four-year fixed-term cash Isa||Punjab National Bank Four-Year Fixed-Term Cash Isa||0.95%||£1,000 minimum initial deposit.||No|
|Three-year fixed-term savings account||JN Bank Three-Year Fixed-Term Savings Account||1.31%||£1,000 minimum initial deposit.||No|
|Three-year fixed-term cash Isa||United Bank UK Three-Year Fixed-Term Cash Isa||1.06%||£2,000 minimum initial deposit.||No|
|Two-year fixed-term savings account||JN Bank Two-Year Fixed-Term Savings Account||1.21%||£1,000 minimum initial deposit.||No|
|Two-year fixed-term cash Isa||OakNorth Bank Two-Year Fixed-Term Cash Isa||0.88%||£1 minimum initial deposit.||No|
|One-year fixed-term savings account||Gatehouse Bank One-Year Fixed-Term Green Saver||1.1% (EPR*)||£1,000 minimum initial deposit.||No|
|One-year fixed-term cash Isa||OakNorth Bank One-Year Fixed-Term Cash Isa||0.72%||£1 minimum initial deposit.||No|
|Instant-access savings account||Marcus by Goldman Sachs Online Savings Account||0.5%||£1 minimum initial deposit. Rate reverts to 0.4% AER after 12 months.||No|
|Instant-access cash Isa||Marcus by Goldman Sachs Cash Isa||0.5%||£1 minimum initial deposit. Rate reverts to 0.4% AER after 12 months.||No|
*Expected profit rate. Source: Moneyfacts. Correct as of 13 July 2021, but rates are subject to change.
As the table shows, no accounts can equal or beat the June 2021 rate of CPI inflation.
There are a few top-rate accounts that can be opened with just £1, but the majority require you to lock away at least £1,000. In the case of a fixed-term account, you’ll need to be sure you can do without that money for the full term – accessing the cash early will usually result in a withdrawal penalty, or won’t be allowed at all.
The account from Gatehouse Bank is Sharia-compliant, and therefore offers an expected profit rate (EPR) rather than an annual equivalent rate (AER). This means that the rate is not guaranteed, but we’ve never heard of an instance in the UK where an Islamic bank has not paid the advertised rate.
- Find out more: how to find the best savings account
Should you get an account with a bonus rate?
Several accounts offering the most competitive instant-access rates feature fixed-term bonuses, which usually last for the first 12 months. After this point, the AER will drop.
Marcus by Goldman Sachs, for instance, is offering 0.5% AER on its instant-access savings account and cash Isa, dropping to 0.4% after 12 months. However, this bonus rate isn’t just available for new customers – existing customers can choose to boost their rate for a year by logging into their account, going to the section ‘review your savings’ and clicking ‘renew your bonus’.
Similarly, Cynergy Bank also pays 0.5% AER on its instant-access savings account, which falls to 0.3% AER after 12 months. This is for new customers only.
Tesco Bank’s instant-access savings account also has a bonus rate. This boosts the AER to 0.41% for 12 months, before dropping to 0.1% AER.
As these bonus rates don’t come with any extra restrictions, they can be a good bet for savers. However, it’s worth making a note of the date your rate is due to drop in your calendar – at this point, consider checking whether you could get a more competitive rate elsewhere.
- Find out more: how to find the best cash Isa
How does CPI inflation affect your savings?
CPI inflation tracks the costs of a ‘shopping basket’ containing around 700 popular goods and services – from T-shirts to tea bags.
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’d bought all the items in the basket in June 2020 and then bought them all again in June 2021, your second shopping trip would have been 2.5% 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 because 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 savings rates are low.
Save with a Which? Recommended Provider
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