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15 Jul 2020

Inflation rises to 0.6% in June 2020: the best savings accounts that can beat it

Are your savings earning a competitive rate?

Inflation rose to 0.6% in June 2020, according to the latest figures from the Office for National Statistics (ONS).

The Consumer Prices Index (CPI) measure of inflation is up from 0.5% in May 2020, partly due to rising prices of computer games and consoles, and the fact that clothing and footwear prices haven't followed the usual sales pattern this year.

Here, Which? reveals why inflation has risen and where you can find the top-rate cash Isas and savings accounts.

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Why has inflation risen?

The main factors behind June's small inflation jump are prices related to recreation, toys and hobbies - particularly computer games and consoles, possibly due to the rise in demand as people looked for ways to stay entertained during the lockdown.

Another upward contribution came from clothing and footwear, where prices didn't fall as much as they did during the sales in 2019. While there is usually a summer sale in June, prices have been broadly flat during the lockdown after reducing in January and February.

The cost of some pharmaceutical products also contributed to the inflation rise, particularly cough liquid and disposable soft contact lenses.

However, it's worth noting that the ONS identified 67 goods and services that are usually factored into the inflation basket that weren't available due to the coronavirus outbreak.

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 as close to 2% as possible.

It's been below this target since August 2019 and has measured below 1% since April 2020, due to the economic effects of the coronavirus outbreak.

Best savings rates that beat June inflation

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

Account typeAccountAERMinimum initial depositDoes this account beat or equal June 2020 inflation?
Five-year fixed-rate savings accountBank of London & The Middle East Five-Year Premier Deposit Account1.5% (EPR*)£1,000Yes
Five-year fixed-rate cash IsaUnited Bank UK Five-Year Fixed Rate Cash Isa1.21%£2,000Yes
Four-year fixed-rate savings accountBank of London & The Middle East Four-Year Premier Deposit Account1.45% (EPR*)£1,000Yes
Four-year fixed-rate cash IsaPunjab National Bank Four-Year Fixed Rate Cash Isa1.15%£1,000Yes
Three-year fixed-rate savings accountBank of London & The Middle East Three-Year Premier Deposit Account1.4% (EPR*)£1,000Yes
Three-year fixed-rate cash IsaUnited Bank UK Three-Year Fixed Rate Cash Isa1.1%£2,000Yes
Two-year fixed-rate savings accountBank of London & The Middle East Two-Year Premier Deposit Account1.35% (EPR*)£1,000Yes

*Expected Profit Rates. Source: Moneyfacts. Correct as of 14 July 2020; rates are subject to change.

All of the accounts in the table can equal or beat the rate of inflation for June 2020.

Savers with smaller sums to spare might feel a little dismayed looking at this list, as only three of these accounts can be opened with less than £1,000. Plenty of other providers will accept savings from £1 upwards, but they often don't pay the highest rates.

Many of the top savings account rates come from the Bank of London & The Middle East, which offers sharia-compliant products. These accounts pay an expected profit rate (EPR), rather than an annual equivalent rate (AER), so the rate that's advertised isn't guaranteed - however, we've never heard of an instance in the UK where an Islamic bank hasn't paid the advertised rate.

Cash Isas vs savings accounts

While cash Isas are consistently beaten on interest by their savings equivalent, remember that these accounts have the advantage of being tax-free - which is particularly beneficial to higher-rate or additional-rate taxpayers, and those with large sums to save.

While interest earned in a savings account counts as part of your personal savings allowance (£1,000 for basic-rate taxpayers; £500 for those who pay higher-rate tax), any interest earned in an Isa won't have any effect on your tax bill - a benefit which can outweigh the small amount of interest you may miss out on.

How does CPI inflation affect your savings?

CPI inflation tracks the cost of a 'basket' containing around 700 popular goods and services - from hotel stays to hair clips.

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 June 2019, and bought them all again in June 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 Isas and savings accounts 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.