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25 Mar 2020

Inflation fell in February 2020: can any savings accounts beat it?

The Bank of England's latest base rate cut is likely to see savings rates slashed

Inflation fell to 1.7% in February 2020, according to the latest figures from the Office for National Statistics (ONS).

The Consumer Prices Index (CPI) inflation is down from 1.8% in January 2020, in part due to reduced prices for motor fuels, games, toys and hobbies.

This comes following the Bank of England's decision on 19 March 2020 to reduce the base rate to just 0.1%, which is likely to see banks slash the rates on their savings products.

Here, Which? reveals why inflation has fallen, where you can find the top savings rates, why the latest base rate change could have an impact on your cash and the big changes to the imaginary 'shopping basket' that inflation is based on for 2020.

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Why has inflation fallen?

The main factors that have caused inflation to decrease are reduced motor fuel prices - particularly petrol - along with price drops across games, toys and hobbies.

Some food prices were also lower, particularly for bread, cereals and vegetables.

This downward contribution was offset by higher prices recorded for restaurants and hotels.

The graph below shows how CPI inflation has varied since January 2015, using figures from the ONS.

The Bank of England has been tasked with keeping inflation around 2%.

It has been below this target since August 2019, but the recent base rate change could see this increase. That's because as savings rates fall, people are more inclined to spend money, which in turn drives up prices.

Best savings rates that beat February inflation

The table below sets out the top rates for fixed-rate and instant-access cash Isas and savings accounts.

Account typeAccountAERTermsDoes this account equal or beat February 2020 inflation?
Five-year fixed-rate savings accountGatehouse Bank Five-Year Fixed-Term Deposit2% EPR*£1,000 minimum initial depositYes
Five-year fixed-rate cash IsaParagon Bank Five-Year Fixed Rate Cash Isa1.6%£500 minimum initial depositNo
Four-year fixed-rate savings accountPunjab National Bank Four-Year Fixed Deposits Annual Interest Earner2%£1,000 minimum initial depositYes
Four-year fixed-rate cash IsaPunjab National Bank Four-Year Fixed-Rate Cash Isa1.6%£1,000 minimum initial depositNo
Three-year fixed-rate savings accountMy Community Bank 36-Month Fixed-Term Savings Account1.9%£1,000 minimum initial depositYes
Three-year fixed-rate cash IsaParagon Bank Three-Year Fixed-Rate Cash Isa1.5%£500 minimum initial depositNo
Two-year fixed-rate savings accountMy Community Bank 24 Month Fixed Term Savings Account1.8%£1,000 minimum initial depositYes

*Expected profit rate. Source: Moneyfacts. Correct as of 24 March 2020; rates are subject to change.

Four accounts in our table can beat the current rate of inflation; all of them are fixed-term savings accounts.

The higher rates are all offered by fixed-term accounts, but before you opt for one of these you must consider whether you'll definitely be able to leave your money locked away for the full term. Some accounts may issue a withdrawal penalty to take your cash out early, while others simply won't allow it.

During the coronavirus outbreak, some banks have relaxed the rules around withdrawing money from fixed-term accounts - find out more in our news story: Coronavirus: what it means for rent, mortgages, savings, borrowing and benefits.

Two of the top deals are from Sharia-compliant providers. These banks offer an Expected Profit Rate (EPR) rather than an Annual Equivalent Rate (AER).

The rate is not guaranteed and could be adjusted at any time - but, at the time of writing, we've not heard of any instance in the UK where an advertised EPR hasn't been paid.

How does the base rate change affect your savings?

On 19 March 2020, the Bank of England cut the base rate to 0.1%, just a week after being cut to 0.25%.

It had been at 0.75% since 2 August 2018. The Bank of England said the move was to help bolster cash flow for households and small businesses affected by the coronavirus.

The base rate dictates the amount of interest banks have to pay when they take loans from the Bank of England, therefore a low base rate means it's cheaper for the banks and encourages them to reduce the interest on their own loan rates.

For this reason, mortgage rates are likely to drop. But, as banks won't need savings deposits to cover their loans, savings rates will usually fall, too.

Rates across savings and cash Isa products had already been falling for some time, and the latest base rate cut is only likely to accelerate this drop.

According to data from Moneyfacts, average rates for long-term fixed-term savings and cash Isa accounts (ie with terms that last 18 months or more) have already fallen by 0.6% and 0.5% respectively since February.

What's in the CPI inflation basket?

CPI inflation tracks the prices of around 700 popular goods and services - from toilet roll to train fares - all held in an imaginary shopping basket.

The figure released each month shows how the price of everything in the basket has collectively changed in comparison to what it cost in the same month of the previous year. So, if you had bought all of the goods and services in February 2020, you'd have paid 1.7% more than in February 2019.

To make sure that the items in the basket reflect what people are actually buying, 16 items have been added for 2020, including gluten-free cereal, cocktails in a can, vegetable crisps and airport parking.

There are 14 items being dropped, which include individual fruit pies (which have been replaced by crumpets), MP4 players and frozen chicken breasts.

If your interest rate doesn't equal or exceed the rate of inflation, your savings will effectively lose value over time. As prices rise, this means you'll be able to buy fewer things with the same amount of cash.

That's why it's important to make sure your money is held in an account that can stay in line or ahead of the rate of inflation.

Save with a Which? Recommended Provider

You can search through hundreds of cash Isas and savings accounts with Which? Money Compare.

The comparison site details the interest and terms of an account, as well as how it rated in our unique savings survey, and it also lists those accounts that have been named a Which? Recommended Provider.

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.