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14 Aug 2019

Inflation rises to 2.1% in July: is it time to switch to a better savings rate?

Find out how to get the best savings rate on the market

Inflation rose to 2.1% in July 2019, according to figures just released from the Office for National Statistics (ONS), mainly due to an increase in the cost of toys, games, accommodation services and clothing.

Consumer Price Inflation (CPI) measured 2% in May and June, down from 2.1% in April 2019.

With inflation on the rise, savers should think about whether their savings are earning the best possible rate.

New data has revealed that only one in seven savings accounts have been switched in the past three years, according to a report from the Current Account Switching Service (CASS).

This means millions of savers will be missing out on today's most competitive rates.

Here, we explain why the inflation rate has changed, and where to find cash Isas and savings accounts that can beat it.

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What are the top-rate savings accounts to beat the July CPI inflation?

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

To beat the current rate of inflation, you'd need to lock your money away for at least one year in a fixed-term savings account, or five years in a cash Isa.

Account typeAccountAERTerms
Five-year fixed-rate savings accountBank of London & The Middle East five-year fixed-term savings account2.8% (EPR*)£1,000 minimum initial deposit
Five-year fixed-rate cash IsaNewcastle Building Society five-year fixed-term cash Isa2.12%£500 minimum initial deposit
Four-year fixed-rate savings accountBank of London & The Middle East four-year fixed-term savings account2.65% (EPR*)£1,000 minimum initial deposit
Four-year fixed-rate cash IsaUnited Trust Bank 4-year fixed-term cash Isa2%£15,000 minimum initial deposit
Three-year fixed-rate savings accountBank of London & The Middle East three-year fixed-term savings account2.6% (EPR*)£1,000 minimum initial deposit
Three-year fixed-rate cash IsaCharter Savings Bank three-year fixed-term cash Isa1.87%£5,000 minimum initial deposit
Two-year fixed-rate savings accountBank of London & The Middle East two-year fixed-term savings account2.45% (EPR*)£1,000 minimum initial deposit

*Expected Profit Rate. Source: Which? Money Compare. Correct as of 13 August 2019.

Since upping its rates last month, Bank of London & The Middle East still holds the top rate across all fixed-term savings accounts.

Like Al Rayan Bank, which also offers top-rate deals, Bank of London & The Middle East is an Islamic bank, which pays an 'Expected Profit Rate' (EPR), rather than an interest rate (AER).

There is, therefore, a small chance that the rate you receive will be different from the one advertised. However, this hasn't happened with any UK Islamic banks to our knowledge.

As is often the case, savers with less than £1,000 to spend may find it difficult to access the top rates: nine of the 12 accounts listed here require you to deposit at least £1,000 to open the account, with Charter Savings Bank and United Trust Bank requiring significantly more.

Even if you have enough cash for the minimum deposit, you'll also need to consider whether you can afford to lock it up for at least a year. If not, you should consider an instant-access account instead.

Remember the cash Isa's tax-free perks

Cash Isa rates often lag behind savings rates, but don't write them off altogether. In some circumstances, their tax-free status can outweigh the loss of a little interest.

While many people don't pay tax on their savings interest thanks to the personal savings allowance, those with larger savings pots and additional-rate taxpayers may face a tax bill.

Currently, basic-rate taxpayers can earn up to £1,000 a year in savings interest tax-free, while higher-rate taxpayers can only earn up to £500. Additional-rate taxpayers don't have a personal savings allowance.

Why has inflation increased?

The main reasons prices have risen are increases in the cost of toys, accommodation, clothing and footwear. These increases were offset by drops in the cost of transport.

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, with rates so far hovering close to this benchmark throughout 2019.

Inflation last peaked at 3.1% in November 2017, when no savings accounts could beat it.

While the situation is much better for savers now, it's not quite as good as it was in January, when CPI inflation hit a two-year low of just 1.8%. At that time, the rate could be beaten by more than 300 cash Isas and savings accounts.

How does CPI inflation affect your savings?

CPI inflation tracks the prices of around 700 popular goods and services, from flights to Frosties cereal, held in an imaginary shopping basket.

The figure that's released each month shows how the price of everything in the basket has changed in comparison with the same month of the previous year. So, if you had bought all of the goods and services in July this year, you'd have paid 2.1% more than in July 2018.

This affects the buying power of your savings. If your interest rate doesn't equal or exceed the rate of inflation, your savings will effectively lose value over time, as you'll be able to buy fewer things with the same amount of cash.

That's why it's important to make sure your money is held in an account that beats 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 exacting standards of our expert researchers.

Those who want a short-term fix from a Which? Recommended Provider could opt for the Kent Reliance one-year fixed-rate bond, paying 1.65% AER and requiring a minimum initial deposit of £1,000. The bank has been rated highly for its interest rate information.

You could also consider the Kent Reliance one-year fixed-rate cash Isa, paying 1.45% AER and you'll need to pay in at least £1,000 to open it.

Elsewhere, Leeds Building Society's two-year fixed-rate cash Isa pays 1.6% AER and can be opened with just £100. Customers rated the provider well across all areas.

If you want a longer-term fix, you could try Nationwide's five-year fixed-rate Isa, which pays 1.6% AER and you'll only need £1 to open it. The provider's been highly rated the for its customer service.

Skipton Building Society's five-year fixed-rate bond offers 1.45% AER on minimum initial deposits of £500 or above. Its customer service and clarity of statement proved popular in our customer survey.

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