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19 Jun 2019

Inflation falls to 2% in May - what's the best savings account to beat it?

Find out the best savings rates to give your cash a boost

Inflation fell to 2% in May 2019, according to the latest figures released this morning from the Office for National Statistics (ONS), mainly due to lower transport fares and falling car prices.

This is down from April, where inflation measured 2.1%.

While this inflation drop means that popular goods and services are more expensive than in May 2018, the change will also have an effect on your cash savings. If you money is earning less than 2% interest, you may see your savings lose value in real terms.

This is particularly worrying considering recent findings that 26% of Brits have savings pots that would last less than a month if they were forced to use them for all of their outgoings, according to research from Yorkshire Building Society. In fact, 11% of those asked expected their savings to last just a few days.

With so many in a potentially precarious position, it's more important than ever to make sure that your savings - however large or small - are growing as much as possible.

Here, we reveal the reasons behind the inflation rate change, and where to find accounts to beat it.

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Which savings accounts can beat inflation?

The table below shows the current top-rate savings and cash Isa accounts, ordered by length of term.

To beat the current rate of inflation, you'd need to lock your money away for at least one year in a savings account, or four years in a cash Isa.

Account typeAccountAERTerms
Five-year fixed-rate savings accountGatehouse Bank five-year fixed-term deposit2.75% (EPR*)£1,000 minimum initial deposit
Five-year fixed-rate cash IsaMetro Bank five-year fixed-rate cash Isa2.1%£1 minimum initial deposit
Four-year fixed-rate savings accountBank of London & The Middle East four-year premier deposit account2.5% (EPR*)£1,000 minimum initial deposit
Four-year fixed-rate cash IsaUnited Trust Bank cash Isa four-year bond2.05%£15,000 minimum initial deposit
Three-year fixed-rate savings accountGatehouse Bank three-year fixed-term deposit2.55% (EPR*)£1,000 minimum initial deposit
Three-year fixed-rate cash IsaDudley Building Society three-year fixed-rate cash Isa1.91%£100 minimum initial deposit
Two-year fixed-rate savings accountAl Rayan Bank 24-month fixed-term deposit2.42% (EPR*)£1,000 minimum initial deposit

*Expected Profit Rate. Source: Which? Money Compare. Correct 19 June 2019.

Before opting for a new savings or cash Isa account, there are a few things you need to ask yourself:

  • Can I afford the minimum initial deposit? This figure is the lowest amount you can deposit into the account to open it and successfully qualify for the advertised AER. We recently wrote about those with smaller savings pots missing out on top rates, and this trend continues - of the top rates in the table, only four will accept a deposit of less than £1,000.
  • Can I commit to a fixed term? If you opt for a fixed-term account, you won't be able to access that money until the term is over - so don't lock it up for five years unless you're sure you won't need it.
  • Are there any additional caveats?While fixed-term accounts tend to be relatively straightforward, terms can be trickier with instant-access accounts. The two in the table above both have bonus periods, meaning the advertised rate will automatically be reduced after a certain amount of time. At that point, you might want to switch to a different account to ensure you're still getting a competitive rate.
  • Find out more:how to find the best savings account

Cash Isas have an added tax-free benefit

With the exception of Coventry Building Society's cash Isa, top-rate savings account rates beat their cash Isa competition for every other term. But it's not all about the rate.

Any money that's saved within a cash Isa wrapper is given a tax-free status. No matter how much savings interest you earn, you'll never be charged tax on it.

Savings interest earned in savings accounts, however, is taxable. The personal savings allowance means that few people have to worry about this, as it enables basic-rate taxpayers to earn up to £1,000 in savings interest without being taxed and higher-rate payers to earn up to £500.

However, if you're an additional-rate taxpayer, you don't receive any personal savings allowance, so a cash Isa may be highly appealing.

The only catch is that you'll need to adhere to the cash Isa limits - you can only pay up to £20,000 into an Isa in each tax year. This can be a cash Isa, stocks and shares Isa, innovative finance Isa, or a mix of all three.

Why has inflation fallen?

The ONS identified the main factors behind the decrease in inflation to be a decrease in transport prices - fares fell by 3.8% between April and May this year, mainly due to the Easter holidays falling in the middle of April. There was also a downward contribution from alcoholic beverages and tobacco.

These lower prices were countered by games and toys becoming more expensive (particularly computer games), as well as smaller price rises across restaurants and hotels, non-alcoholic drinks and food.

The graph below shows how CPI inflation has changed since 2013, with figures sourced from the ONS.

The Bank of England aims to keep inflation as close to 2% as possible, with the rate hovering close to this benchmark over recent months.

Inflation last peaked at 3.1% in November 2017, at which point no savings or cash Isa accounts could beat it - so things are much better for savers now.

By contrast, the inflation rate hit a two-year low of 1.8% in January 2019.

How does CPI inflation affect your savings?

CPI inflation tracks the prices of around 700 popular goods and services held in an imaginary shopping basket.

The figure released each month shows how the prices of everything in the basket compares with the same time the year before.

So, taking this month as an example, if you had bought everything in the shopping basket last year, it would cost you 2% more to buy the same things this year.

If your rate of interest doesn't keep up or exceed the rate of inflation, your savings will lose value, as your cash will be able to buy fewer things than in the year before.

So, in order to see your savings grow, you need to find an account that beats the rate of inflation.

Save with a Which? Recommended Provider

Which? Recommended Providers are companies that have been rated highly by the respondents to our unique customer survey and have products that meet the high standards of our researchers.

For longer-term fixed-rate savings, Leeds Building Society offers a five-year fixed-rate bond paying 2% AER, and a four-year account that pays 1.87% AER. Both require a minimum initial deposit of £100, and the provider has been highly rated for its interest rate information.

For something shorter-term, there's the Kent Reliance two-year fixed-rate bond, which offers 1.9%. You'll have to deposit at least £1,000, and the bank's customers were also impressed with its interest rate information.

And if you're after the flexibility of instant-access accounts, there's the aforementioned easy access Isa from Coventry Building Society, paying a market-leading 1.5% AER. Customers valued many areas of the provider's customer service, particularly the clarity of its statements.

There's also the Kent Reliance easy access account, which gives 1.3% AER and requires £1,000 to open it.

Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms & conditions of a provider before committing to any financial products.

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? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.