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22 May 2019

Inflation rises to 2.1% in April - can your savings account match it?

Find the best savings accounts that can beat inflation
Man checking supermarket receipt

Inflation jumped to 2.1% in April 2019, according to the latest figures from the Office for National Statistics (ONS), mainly due to rising energy prices and airfares.

This is up from March and February, where inflation remained at 1.9%. In January, inflation dropped to 1.8% - its lowest point for two years.

While this means that popular goods and services are more expensive than last year, it will also have a knock-on effect on your cash savings. If your cash is earning less than 2.1% interest, you may see your nest egg lose value in real terms.

Which? reveals why it's important for your savings to grow faster than inflation, and which accounts can help you do it.

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Which top-rate savings accounts can beat inflation?

The table below shows the current top-rate savings and cash Isa accounts, ordered by length of term.

Account typeAccountAERTerms
Five-year fixed-rate savings accountGatehouse Bank five-year fixed-term deposit2.75% EPR*£1,000 minimum initial deposit
Five-year fixed-rate cash IsaShawbrook Bank five-year fixed-rate cash Isa bond2.3%£1,000 minimum initial deposit
Four-year fixed-rate savings accountBank of London & The Middle East four-year premier deposit account2.5% EPR*£1,000 minimum initial deposit
Four-year fixed-rate cash IsaUnited Trust Bank cash Isa four-year bond2.2%£15,000 minimum initial deposit
Three-year fixed-rate savings accountGatehouse Bank three-year fixed-term deposit2.55% EPR*£1,000 minimum initial deposit
Three-year fixed-rate cash IsaState Bank of India three-year cash Isa fixed deposit2.05%£5,000 minimum initial deposit
Two-year fixed-rate savings accountAl Rayan Bank 24-month fixed-term deposit2.42% EPR*£1,000 minimum initial deposit

*Expected Profit Rate. Source: Which? Money Compare. Correct 21 May 2019.

As the table shows, you'll have to lock your money away for at least a year in a top-rate fixed-term savings account to beat inflation. If you opt for a cash Isa, you'll have to put your money away for at least four years.

You should also bear in mind that every fixed-rate account here requires a minimum initial deposit of at least £1,000, which might not be a viable option for those with smaller savings pots.

If you're likely to need more flexibility with your savings, you could consider an instant-access account. This is the only category where savings and cash Isas are matched. Both require just £1 to open, and offer 1.5% AER. While this rate doesn't beat inflation, it at least gives you some form of return.

However, note that both top-rate accounts have a bonus rate. This means the Marcus by Goldman Sachs AER will fall to 1.35% after 12 months, and Coventry Building Society's Isa drops to 1.15% after 31 August 2020 . Once this happens, you may want to switch accounts if you're no longer earning a competitive rate.

Don't forget about cash Isas' tax-free status

While fixed-rate cash Isa rates are lagging behind savings accounts, don't let that put you off altogether.

Cash Isas have the advantage of being tax-free. Any interest your money earns will never count towards your personal savings allowance, and therefore you'll never be liable to pay tax on it. For some, this benefit can outweigh what you lose in interest.

Having tax-free savings is particularly useful for high earners and those with significant savings, who are either likely to exceed their personal savings allowance, or who pay additional-rate tax and don't receive one.

You are, however, restricted by the Isa allowance, meaning you can only pay in a total of £20,000 in 2019-20.

Why has inflation risen?

The ONS found that the main factors behind the inflation uptick were price rises across many broad categories, particularly airfares, fuels and new cars. This was offset by price cuts across clothing and footwear.

The graph below shows how CPI inflation has changed since 2013, with figures sourced from the ONS.

The Bank of England aims to keep inflation as close to 2% as possible. Inflation has hovered around this benchmark in recent months, after peaking at 3.1% in November 2017. At that point in time, no savings or cash Isa accounts could beat the rate of inflation.

How does CPI inflation affect your savings?

CPI inflation tracks the prices of around 700 goods and services within an imaginary shopping basket, to see whether they've become more or less expensive compared to the same point in the previous year.

Taking this month as an example, buying everything in the shopping basket would cost 2.1% more than it did in April 2018.

If your cash has grown by less than the rate of inflation for the last 12 months, it will have effectively lost value, as you'll be able to buy less with it.

In order to see your savings grow - or, at the very least, break even - you need to find an account that beats or matches the rate of inflation.

Save with a Which? Recommended Provider

Which? Recommended Providers are companies that have been rated highly by the respondents to our unique customer survey and have products that meet the high standards of our researchers.

If you're looking to save over a longer term, the Leeds Building Society five-year fixed-rate Isa pays 2.05% AER, and requires a minimum initial deposit of £100. The bank scored highly for its interest rate information.

For a shorter fix, there's the Kent Reliance two-year fixed-rate bond, offering 2.1% AER and requiring an initial deposit of £1,000. Alternatively, the bank's one-year fixed-rate bond pays 1.85% AER.

If you want your savings to be flexible, Coventry Building Society's instant-access Isa tops the table for this term at 1.5% AER, and was rated highly by customers for its clarity of statement and interest rate information.

Skipton Building Society's online bonus saver also offers instant access. It pays 1.42% AER, and you only need £1 to open it. Plus, customers rated its clarity of statement and customer service.