Inflation falls sharply to 7.9% – how do savings rates compare?

Inflation fell by more than expected to 7.9% in June 2023, according to data from the Office for National Statistics (ONS). It's the lowest it has been in more than a year, after being stuck at 8.7% for the previous two months.

The Consumer Prices Index (CPI) measure of inflation, which tracks the cost of an imaginary 'shopping basket' of around 700 popular goods and services, is down from May 2023, when it sat at 8.7% for the second month in a row.

Even when there's a decrease in the inflation figure, it doesn't mean that prices will fall as well – it simply shows they're rising more slowly.

Here, Which? explains why the inflation rate has dropped, and how it compares to the top-rate savings accounts and cash Isas. We also share tips for tackling the rising cost of living.

Why has inflation fallen?

Economists widely predicted inflation would drop to 8.2%, but a sharp fall in petrol and diesel prices helped drive it down even lower. The last time inflation was below 8% was in March 2022 when it stood at 7%.

Petrol prices fell by 1.4p per litre between May and June 2023, compared with a rise of 18.1p per litre between the same two months a year ago. Similarly, diesel prices fell by 8.9p per litre this year, compared with a rise of 12.7p per litre a year ago.

There was a glimmer of hope for households struggling to afford a supermarket shop, as ONS figures show food inflation eased again, dropping to 17.3% in June from 18.3% in May. The cost of milk, cheese and eggs fell the most.

Separate figures from market analysts Kantar also showed that grocery inflation dropped to 14.9% in the four weeks to 9 July, down from 16.5% over the previous month.

Prices remain stubbornly high, however. Which? analysis of more than 21,000 food and drink products at eight major supermarkets found that food inflation has risen 25.8% over the past two years.

Some items were almost three times more expensive in the three months to the end of June 2023 compared to the same period in 2021.

The graph below shows how inflation has changed since August 2020:

The Bank of England’s target is to keep inflation as close to 2% as it can, but it hasn’t been that low since July 2021. Before that, inflation was very low – hitting a rock bottom figure of 0.2% in August 2020 due to the impact of the pandemic.

Can any savings rates beat CPI inflation?

This table shows the top rates for fixed-term and instant-access cash Isas and savings accounts, ordered by term.

Despite savings rates for some accounts now above 6% AER, none can match or beat today's inflation figure. But don't let that put you off opening a savings account. 

Savings rates have come a long way since this time last year, when even a five-year fixed term account only paid 3.45%.

The best rates in today's market come from challenger banks and building societies. Some are offering fixed-term accounts with rates above 6%.

One-year fixed bonds are seeing the fiercest competition for the top spot in rates table. If you're prepared to lock your money away for more time, you may find better returns in the long run with a two to five-year account. That's because if you want to reinvest your savings once the one-year bond matures in 12 months time, you may find savings rates are significantly lower than now. 

• Find out more: how to find the best savings account

How does CPI inflation affect your savings?

CPI inflation is the speed at which the prices of the goods and services bought by households rise or fall. It tracks the costs of a shopping basket of around 700 popular goods and services bought by households – from tinned tomatoes to train journeys.  

The figure – provided by the ONS each month — shows how much prices have changed compared with the same month of the previous year. For example, if you'd bought all the items in the basket in June 2022 and bought them again in June 2023, you could expect your shop this year to be 7.9% more expensive.  

When you keep money in your bank, you'll likely be earning interest, which should reduce the effects of inflation. If your savings aren't growing at the same rate of inflation or more, they will effectively lose value because you'll be able to buy less with it. That's why you should ensure that your money is getting the best interest rate possible – even when savings account rates are low.

• Find out more: how to find the best cash Isa

How to cut costs when prices are still high

The decrease in inflation doesn't mean prices are falling; it just means they're rising at a slower rate than before.

For drivers, it will be a relief to hear that the price of petrol and diesel has fallen again – but the cost of filling up your car at the pump is still very high. To help, we've put together a guide full of practical tips on reducing how often you need to fill up, and where to go when you do.

The ONS's new Opinions and Lifestyle survey shows the price of food shopping continues to squeeze household budgets, with around one in 20 (5%) of adults saying that in the past two weeks they had run out of food and been unable to afford more. 

If you're struggling, then we have lots of advice to help you cut costs on your grocery shopping, from avoiding convenience stores and choosing own labels over big brands to joining loyalty schemes. Switching supermarkets could also lower your bill, so take a look at our comparison of UK shops to see how your favourite store measures up.

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