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21 Apr 2021

Inflation rises to 0.7% in March 2021 - which savings accounts can beat it?

Find out the best savings rates, plus a look at what the future holds for inflation

Inflation rose to 0.7% in March 2021, according to the latest figures from the Office for National Statistics (ONS) - partly due to price rises for transport and clothing.

The Consumer Prices Index (CPI) measure of inflation is up from 0.4% in February 2021.

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 that caused March's inflation rise are price rises for transport, particularly motor fuels, which had fallen between February and March 2020.

Clothing and footwear prices have also risen recently, but as clothing sales didn't follow their usual pattern last year due to the coronavirus pandemic, it means this year's price rises are set against a fall during the same period in 2020.

There was also an offsetting downward contribution, which has possibly also been influenced by the pandemic, as prices for food and non-alcoholic beverages have fallen, compared with a rise last year. These products include chocolate biscuits, cereal bars, chilled pizzas and crumpets.

The graph below shows how CPI inflation has fared since January 2017.

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 measured at 1% or below since April 2020 due to the economic effects of the coronavirus pandemic.

Best savings rates that beat March inflation

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

Account typeAccountAERTermsDoes this account beat or equal March inflation?
Five-year fixed-term savings accountGatehouse Bank Five-Year Fixed-Term Green Saver1.4% (EPR*)£1,000 minimum initial depositYes
Five-year fixed-term cash IsaShawbrook Bank Five-Year Fixed-Term Cash Isa1.1%£1,000 minimum initial depositYes
Four-year fixed-term savings accountZopa Four-Year Fixed-Term Savings Account0.95%£1,000 minimum initial depositYes
Four-year fixed-term cash IsaPunjab National Bank Four-Year Fixed-Term Cash Isa0.8%£1,000 minimum initial depositYes
Three-year fixed-term savings accountHodge Bank Three-Year Fixed-Term Savings Account0.95%£1,000 minimum initial depositYes
Three-year fixed-term cash IsaPunjab National Bank Three-Year Fixed-Term Cash Isa0.7%£1,000 minimum initial depositYes
Two-year fixed-term savings accountBank of London & The Middle East Two-Year Fixed-Term Premier Deposit Account0.8% (EPR*)£1,000 minimum initial depositYes

*Expected profit rate. Source: Moneyfacts. Correct as of 20 April 2021, but rates are subject to change.

As the table shows, seven of the top-rate account rates equal or beat the March rate of CPI inflation. To get them, you'll have to commit to a fixed-term account of at least two years for a savings account, or three years for a cash Isa.

While it's usually the case that the longer you lock away your cash in a fixed-term account, the more interest you'll get, this doesn't always follow. The highest rate for a one-year fixed-term cash Isa is currently the same as the top-rate instant-access cash Isa. Similarly, you can also get the same top rate if you commit to a three or four-year savings account.

You'll need to weigh up whether you want to lock up your cash now in case rates fall further, versus possibly missing out on better rates as and when the situation improves.

Note that the accounts from the Bank of London & The Middle East and Gatehouse Bank are Sharia-compliant, and therefore offer an expected profit rate (EPR) rather than an annual equivalent rate (AER). This means the rate is not guaranteed; however, we've never heard of an instance in the UK where an Islamic bank has paid out less than its advertised rate.

Inflation to rise steeply in the coming months

Despite the many financial issues caused by the pandemic, prices for goods and services remaining low is likely to have been welcomed by consumers - but it appears it won't last.

Two in five companies believe their prices will increase in the next three months due to inflation, according to a recent survey of more than 5,800 firms from the British Chambers of Commerce (BCC).

The inflation rise could happen even sooner; in its latest meeting in March the Bank of England's Monetary Policy Committee said it expected the 2% target to be reached this spring, where it has been projected to stay for some time afterwards.

This may spell bad news for savers and spenders alike, as the prices of goods and services will increase and savings rates are unlikely to be able to keep up with them. As the table above shows, no savings providers currently offer anywhere near 2% AER, but it's still important to find as competitive a rate as possible.

How does CPI inflation affect your savings?

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

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 March 2020, and bought them all again in March 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 because 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.