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Updated: 27 Jan 2022

Inflation falls to 0.4% in February 2021 - what does this mean for your savings?

Find out the best savings rates plus what's made it into the 2021 inflation basket

Inflation fell to 0.4% in February 2021, according to the latest figures from the Office for National Statistics (ONS) - partly due to falling prices for second-hand cars, clothing, toys and games.

The Consumer Prices Index (CPI) measure of inflation is down from 0.7% in January 2021.

Here, Which? reveals why the inflation rate has changed, and where you can find the best savings accounts and cash Isas to beat it.

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Why has inflation fallen?

The main factors between February's inflation fall are price drops for clothing and footwear, which are down 5.6% - the biggest drop this category has seen since November 2009.

It's thought this is due to the current lockdown, and the fact that clothing prices didn't follow the usual sales pattern last year due to the impact of coronavirus.

Other factors include lower prices for food and non-alcoholic beverages, games, toys and hobbies, and second-hand cars.

The Bank of England has been tasked with keeping inflation as close to 2% as possible. However, it's been below this target since August 2019, and has been at 1% or below since April 2020 due to the economic effects of the coronavirus pandemic.

Best savings rates that beat February inflation

The table below sets out the top rates for fixed-rate and restriction-free instant-access savings accounts and cash Isas, by order of term.

Account typeAccountAERTermsDoes this account beat or equal February inflation?
Five-year fixed-term savings accountHodge Bank Five-Year Fixed-Rate Account1.3%£1,000 minimum initial depositYes
Five-year fixed-term cash IsaUnited Bank UK Five-Year Fixed-Rate Cash Isa1.15%£2,000 minimum initial depositYes
Four-year fixed-term savings accountBank of London & The Middle East Four-Year Premier Deposit Account1.05% (EPR*)£1,000 minimum initial depositYes
Four-year fixed-term cash IsaPunjab National Bank Four-Year Fixed-Rate Cash Isa0.8%£1,000 minimum initial depositYes
Three-year fixed-term savings accountBank of London & The Middle East Three-Year Premier Deposit Account1% (EPR*)£1,000 minimum initial depositYes
Three-year fixed-term cash IsaShawbrook Bank Three-Year Fixed-Rate Cash Isa0.75%£1,000 minimum initial depositYes
Two-year fixed-term savings accountBank of London & The Middle East Two-Year Premier Deposit Account0.75% (EPR*)£1,000 minimum initial depositYes

*Expected profit rate
Source: Moneyfacts. Correct as of 23 March 2021, but rates are subject to change

As the table shows, all of the top-rate accounts equal or beat February's rate of inflation.

There's little difference in interest between the top instant-access accounts and shorter fixed-term accounts, so you'll have to commit to a longer fix for the interest gain to be worth it. However, as rates are continuing to fall across the board, instant-access accounts may go even lower.

Note that the accounts offered by the Bank of London & The Middle East and Al Rayan Bank are Sharia-compliant, and therefore 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 in the UK where a bank has not paid its advertised rate.

What's in the inflation basket for 2021?

Each year, the 'shopping basket' of popular goods and services that have their prices tracked is updated to reflect the most up-to-date shopping trends. This is necessary to make sure that the inflation figures reflect what people are actually buying.

For 2021, 17 items have been added and 10 have been removed. Since the last basket update in February 2020, it seems the coronavirus pandemic has had a pretty clear effect on people's shopping habits.

New items in the basket include hand hygiene gel, men's loungewear bottoms and hand weights, such as dumbbells, for home exercise. Other new additions include smartwatches, frozen pre-prepared vegetables and women's sweatshirts.

Some items that have fallen out of favour, and have therefore been removed from the basket include white chocolate, staff restaurant sandwiches and ground coffee.

How does CPI inflation affect your savings?

As mentioned above, CPI inflation tracks the costs of a 'shopping basket' containing around 700 popular goods and services - from dumbbells to deodorant.

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 February 2020, and bought them all again in February 2021, your second shopping trip would have been 0.4% 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 falling.

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 Which? Recommended Providers.

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.