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17 Nov 2021

Inflation jumps to 4.2% in October 2021: can any savings rates beat it?

Which? reveals where to find the top-rate savings accounts

Inflation rose sharply to 4.2% in October 2021, according to the latest figures from the Office for National Statistics (ONS) - partly due to rising prices for motor fuels and second-hand cars.

The Consumer Prices Index (CPI) measure of inflation is up from 3.1% in September 2021. CPI inflation tracks the costs of a 'shopping basket' containing around 700 popular goods and services.

The latest figure is the highest CPI measure since November 2011, when it was 4.8%.

Here, Which? reveals why the inflation rate has changed, and how it compares to top-rate savings accounts and cash Isas currently on the market.

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Why has inflation risen?

The main factors that caused inflation to rise in October were rising motor fuel prices, especially considering prices dropped between March 2020 and February 2021.

Second-hand car prices have also risen, with increased demand thought to be due to people seeking alternatives to public transport due to the coronavirus pandemic.

Other price rises that affected the inflation figure were from air fares, restaurants and hotels.

The graph below shows how inflation has fared since September 2017, using data from the ONS.

The Bank of England has been tasked with keeping inflation as close to 2% as possible. CPI inflation measured below this figure between August 2019 and April 2021, reaching as low as 0.2% in August 2020 due to the economic effects of the coronavirus pandemic. However, it's estimated that inflation will remain well above 2% for some time to come.

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Can any savings rates beat inflation?

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

Account typeAccountAERTermsDoes this account equal or beat October inflation?
Five-year fixed-term savings accountGatehouse Bank Five-Year Fixed-Term Woodland Saver2.05% (EPR*)£1,000 minimum initial depositNo
Five-year fixed-term cash IsaUnited Bank UK Five-Year Fixed-Term Cash Isa1.61%£2,000 minimum initial depositNo
Four-year fixed-term savings accountGatehouse Bank Four-Year Fixed-Term Woodland Saver1.92% (EPR*)£1,000 minimum initial depositNo
Four-year fixed-term cash IsaUnited Bank UK Four-Year Fixed-Term Cash Isa1.36%£2,000 minimum initial depositNo
Three-year fixed-term savings accountUnited Trust Bank Three-Year Fixed-Term Deposit1.82%£5,000 minimum initial depositNo
Three-year fixed-term cash IsaUnited Bank UK Three-Year Fixed-Term Cash Isa1.31%£2,000 minimum initial depositNo
Two-year fixed-term savings accountBank of London & The Middle East Two-Year Fixed-Term Premier Deposit Account1.6% (EPR*)£1,000 minimum initial depositNo

Source: Moneyfacts. Correct as of 16 October 2021, but rates are subject to change. *The accounts from the Bank of London & The Middle East and Gatehouse Bank are Sharia-compliant, and so offer an expected profit rate (EPR) as opposed to interest (AER).

As the table shows, no accounts can equal or beat the October rate of CPI inflation.

Only one account offering a top rate will accept a minimum initial deposit of less than £1,000; you can open Hampshire Trust Bank's one-year fixed-term cash Isa with just £1. However, for any other type of account, those with less than £1,000 to put away may have to go for a slightly lower interest rate.

If you're tempted to go for a higher rate and sign up for a fixed-term account, make sure you can do without any money you deposit for the full term. While many accounts will let you withdraw your cash early, you'll usually be charged a hefty interest penalty.

Cash Isa rates improve

While the table above shows that top-rate cash Isas often offer less interest than the savings account equivalent, cash Isas are seeing a post-Covid recovery according to data from Moneyfacts.

Average rates for one-year and longer-term fixed-rate cash Isas rose for the seventh consecutive month. The average rate for a one-year fix is now 0.56%, up from 0.53% last month.

Similarly, the average long-term fixed-rate account (i.e. an account with a fixed term of 18 months or more) is now 0.92%, up from 0.83% in October.

There's also more choice now; this month there are 382 cash Isa deals on the market, up from 356 a year ago.

But the market still isn't back to pre-pandemic levels. November 2019 had an extra 40 cash Isas to choose from, with average rates far above what's on offer now. Two years ago, the average rate for an instant-access cash Isa was 0.87% - almost 30% higher than the current top-rate account. But at least it's finally moving in the right direction.

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 tuna to train tickets.

The figure - which is 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 same items in the basket in October 2020 and bought them all again the same month in 2021, you could expect your shop this year would be 4.2% 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 that your money is making the best return possible - even when savings rates are low.