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18 Aug 2021

Inflation falls to 2% in July 2021: what does this mean for your savings?

Woman shopping in a supermarket

Inflation fell to 2% in July 2021, according to the latest figures from the Office for National Statistics (ONS) - partly due to falling prices for games, toys and packaged holidays.

The Consumer Prices Index (CPI) measure of inflation is down from 2.5% in June 2021. CPI inflation tracks the costs of a 'shopping basket' containing around 700 popular goods and services.

July's inflation figures will also be used to determine next year's rail fare price rises. The Retail Prices Index (RPI) fell to 3.8% in July, from 3.9% in June. This measure of inflation is used to calculate the cap on annual rail season ticket prices. Despite the small fall from June, many commuters will have to pay more to get to work from January; the July rate is the highest recorded for this month in 10 years.

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.

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Why has inflation fallen?

The main factors that caused July's inflation drop were price falls in recreation and culture, particularly data processing equipment, recording media, games, toys and hobbies, and package holidays.

There was also a large downward contribution from clothing and footwear, of 0.09%. But the ONS says that the amounts of discounting recorded for such items in both June and July were below levels usually seen in these months.

Restaurant and hotel prices also decreased overall, but there was a small upward contribution from accommodation services, where prices rose overall, compared with a fall a year ago.

Smaller falls in price came from things like alcohol, tobacco, furniture, household equipment and maintenance.

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, meaning it's reached its target for July. May 2021 was the first time it's exceeded 2% 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.

Do any savings rates beat inflation?

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

Account typeAccountAERTermsDoes this account equal or beat June inflation?
Five-year fixed-term savings accountUnited Bank UK Five-Year Fixed-Term Deposit1.66%£2,000 minimum initial deposit.No
Five-year fixed-term cash IsaUnited Bank UK Five-Year Fixed-Term Cash Isa1.31%£2,000 minimum initial deposit.No
Four-year fixed-term savings accountJN Bank Four-Year Fixed-Term Savings Account1.55%£1,000 minimum initial deposit.No
Four-year fixed-term cash IsaUnited Bank UK Four-Year Fixed-Term Cash Isa1.11%£2,000 minimum initial deposit.No
Three-year fixed-term savings accountUnited Trust Bank Three-Year Bond1.45%£5,000 minimum initial deposit.No
Three-year fixed-term cash IsaParagon Bank Three-Year Fixed-Rate Cash Isa1.11%£500 minimum initial deposit.No
Two-year fixed-term savings accountDF Capital Two-Year Fixed-Rate Deposit (Issue 4)1.40%£1,000 minimum initial deposit.No

Source: Moneyfacts. Correct as of 17 August 2021, but rates are subject to change.

As the table shows no accounts can equal or beat the July 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 £500. For a fixed-term account, you'll need to be sure you can do without the money for the full term - accessing the cash early will usually result in a withdrawal penalty, or won't be allowed.

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 like clothing and food.

The figure - which is provided by the ONS each month - shows how much prices have changed compared to the same month of the previous year.

For example, if you'd bought all the same items in the basket in July 2020, and bought them all again the same month in 2021, your shop this year would be 2% more expensive.

When you keep money in your bank, you'll likely be earning interest, which should balance out the effects of inflation.

If your cash isn't growing in interest at the same rate of inflation or more, it will effectively lose value because you'll be able to buy less with it.

That's why you should ensure your money is making the best return possible - even when savings 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 shows the interest rate and terms of an account, as well as how providers have been rated in our latest savings survey and whether they have been named Which? Recommended Providers (WRPs).

WRPs 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.