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Inflation rises to 0.7% in January 2021 - what does this mean for your savings?

Which? reveals where you can find the best savings rates

Inflation rose to 0.7% in January 2021, according to the latest figures from the Office for National Statistics (ONS) - partly due to rising prices for food, transport, hotels and restaurants.

The Consumer Prices Index (CPI) measure of inflation is up from 0.6% in December 2020.

Here, Which? reveals why the inflation rate has changed, and where you can find the best savings accounts and cash Isas to beat it.

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Why has inflation risen?

The main factors behind January's inflation rise are price increases for hotels and restaurants, food and transport.

While hotels and restaurants were closed throughout January due to the national lockdown, the ONS has applied price increases using its CPI monthly and annual growth rates (for available items), which meant prices rose more than they did at the same time last year.

Food and non-alcoholic beverages also saw price rises - particularly vegetables, and oils and fats.

In transport, costs for the purchase of vehicles and the operation of personal transport equipment rose, but were offset by price falls for sea and rail fares - the rail fares price difference is likely to be because the annual price rise has been delayed to 1 March 2021, whereas it would usually be introduced in January.

The graph below shows how the CPI inflation rate has fared over the past few years.

The Bank of England has been tasked with keeping inflation as close to 2% as possible. However, it's been 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.

Best saving rates that beat January 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 January 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 Deposit1.15%£100 minimum initial deposit. Must have a savings or current account with the provider to open a fixed-term deposit.Yes
Four-year fixed-term cash IsaPunjab National Bank Four-Year Fixed-Term Cash Isa0.95%£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 IsaGatehouse Bank Three-Year Fixed-Term Cash Isa0.9% (EPR*)£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 16 February, but rates are subject to change.

As the table shows, only the top-rate fixed-term accounts can beat January's rate of inflation.

The accounts from Al Rayan Bank and Gatehouse Bank are sharia-compliant, which means they pay 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 a bank has not paid this rate.

Marcus opens to new customers

Those looking for a new instant-access savings account might be interested to know that Marcus by Goldman Sachs is now accepting new customers.

It closed in July 2020 following a surge in demand when other providers quickly reduced interest rates in response to the Bank of England base rate being reduced to a historic low of 0.1%.

The online-only account first opened in September 2018, where it offered a market-leading rate of 1.5% AER for several months. Days of such interest are long gone, unfortunately - today, the Marcus account still offers a top-rate, but now that's just 0.5% AER.

Will rates improve for 'Isa season'?

According to data from Moneyfacts, average interest rates across cash Isas and savings accounts continued to fall across the board as of 1 February 2021.

While this has been the trend for some time, it will be disappointing for Isa savers who had been hoping to see an uptick in interest ahead of 'Isa season' - this is the period leading up to the new tax year on 6 April where Isa providers traditionally up their rates to lure in savers who haven't yet used all their Isa allowance for the current tax year.

The graph below shows the average Isa rates for the past year. Long-term accounts refer to those of 18 months or more.

As the graph shows, average interest rates on cash Isas are still falling - but, rates for long-term and instant-access accounts are at least levelling out a little, having only fallen 0.01% between January and February 2021.

Average interest rates for one-year fixed-rate accounts fell by 0.05% over the same period.

How does CPI inflation affect your savings?

CPI inflation tracks the costs of a 'shopping basket' containing around 700 popular goods and services - from board games to brioche buns.

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 the items in the basket in January 2020, and bought them all again in January 2021, your second shopping trip would have been 0.7% 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 Which? Recommended Providers.

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.