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20 Jan 2021

Inflation rises to 0.6% in December 2020 - can any savings accounts beat it?

Which? reveals where you can find the best savings rates

Inflation rose to 0.6% in December 2020, according to the latest figures from the Office for National Statistics (ONS) - partly due to rising costs for transport and clothing.

The Consumer Prices Index (CPI) measure of inflation is up from 0.3% in November.

Here, Which? reveals why the inflation rate changed, where to find the top-rate savings accounts and cash Isas, and looks at what happened to inflation throughout 2020.

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Why has inflation risen?

The main factors behind December's inflation rise are price rises for transport services. Despite coronavirus travel restrictions, costs for air fares followed their same annual pattern by rising between November and December. Sea and coach fares also increased.

Elsewhere, petrol and diesel prices also rose more between November and December 2020 than they did between the same two months last year, which also contributed to the inflation figure.

Prices for clothing and footwear also increased slightly in December 2020; in December 2019 prices were reduced.

What happened to inflation in 2020?

The announcement of December's inflation rate provides the final piece of the puzzle for 2020 - the CPI inflation rate for the whole of last year is set out in the graph below using figures from the ONS.

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

Inflation was briefly boosted in July, due to price rises across motor fuels and women's clothing, but dramatically fell again in August due to reduced prices in restaurants and cafes from the government's Eat Out To Help Out scheme.

Another dip was recorded in November, partly due to many retailers offering extended Black Friday deals after many months of sales.

Best savings rates that beat December 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 beat or equal December inflation?
Five-year fixed-term savings accountGatehouse Bank Five-Year Fixed-Term Deposit1.5% (EPR*)£1,000 minimum initial depositYes
Five-year fixed-term cash IsaGatehouse Bank Five-Year Fixed-Term Cash Isa1.3% (EPR*)£1,000 minimum initial depositYes
Four-year fixed-term savings accountPunjab National Bank Four-Year Fixed-Term Deposit1.3%£100 minimum initial depositYes
Four-year fixed-term cash IsaPunjab National Bank Four-Year Fixed-Term Cash Isa1.1%£1,000 minimum initial depositYes
Three-year fixed-term savings accountGatehouse Bank Three-Year Fixed-Term Deposit1.25% (EPR*)£1,000 minimum initial depositYes
Three-year fixed-term cash IsaPunjab National Bank Three-Year Fixed-Rate Cash Isa1%£1,000 minimum initial depositYes
Two-year fixed-term savings accountGatehouse Bank Two-Year Fixed-Term Deposit1.1% (EPR*)£1,000 minimum initial depositYes

*Expected profit rate. Source: Moneyfacts. Correct as of 19 January 2021, but rates are subject to change.

As the table shows, all but one of these top-rate accounts can beat December's rate of inflation. There are no restriction-free instant-access savings accounts that pay 0.6% or more.

The accounts from Gatehouse Bank and Al Rayan Bank are sharia-compliant, meaning they 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 an Islamic bank has not paid its advertised savings rate.

Many of the top-rate accounts require a minimum initial deposit of £1,000, which may not work for those who don't have a lot of cash to lock away.

Average rates reach new lows, again

Average savings rates across the board are still falling, despite already reaching new lows in December.

The graph below shows how average rates for cash Isas and savings accounts have fared during 2020, using data from Moneyfacts. Long-term fixed-rate savings accounts are those with terms of 18 months or more.

As the graph shows, the average rates for instant-access savings accounts are now down to just 0.18%, while the average cash Isa equivalent is 0.25%.

Rates are falling even faster on fixed-term products; the average rate for long-term fixed-rate savings accounts fell by 0.7% in just a month, standing at just 0.7% at the start of January 2021. This is just 0.21% more than the average one-year fixed-term account, which currently stands at 0.49%.

How does CPI inflation affect your savings?

CPI inflation tracks the costs of a 'shopping basket' containing around 700 popular goods and services - from satsumas to slippers.

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 of the items in the basket in December 2019, and bought them all again in December 2020, your second shopping trip would have been 0.6% 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 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.