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19 Jan 2022

Inflation rises to 5.4% in December 2021: can any savings rates beat it?

Which? reveals the top-rate cash Isas and savings accounts

Inflation rose to 5.4% in December 2021, according to the latest figures from the Office for National Statistics (ONS) - the highest it's been in 30 years.

The Consumer Prices Index (CPI) measure of inflation is up from 5.1% in November - a figure so high it sparked the Bank of England to increase the base rate to 0.25% in December.

December's CPI figure is the highest we've seen since March 1992.

CPI inflation tracks the costs of a 'shopping basket' containing around 700 popular goods and services.

Here, Which? reveals why the inflation rate has changed, and how it compares with the top-rate cash Isas and savings accounts currently on the market.

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Why has inflation risen?

There were a broad number of factors that caused December's inflation increase, which included price rises for food and non-alcoholic beverages, and transport - particularly petrol and second-hand cars.

The graph below shows how inflation has fared since October 2017, using data from the ONS.

The Bank of England has been tasked with keeping inflation as close to 2% as possible. CPI inflation measured below this figure between August 2019 and April 2021, reaching as low as 0.2% in August 2020 due to the economic effects of the coronavirus pandemic. However, it's estimated that inflation will remain well above 2% for some time to come.

Can any savings rates beat CPI inflation?

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

Account typeAccountAERTermsDoes this account equal or beat December inflation?
Five-year fixed-term savings accountCharter Savings Bank Five-Year Fixed-Rate Bond2.1%£5,000 minimum initial depositNo
Five-year fixed-term cash IsaUnited Trust Bank Five-Year Fixed-Term Cash Isa1.75%£1,000 minimum initial depositNo
Four-year fixed-term savings accountGatehouse Bank Four-Year Fixed-Term Woodland Saver1.92% (EPR*)£1,000 minimum initial depositNo
Four-year fixed-term cash IsaUnited Trust Bank Four-Year Fixed-Term Cash Isa1.42%£1,000 minimum initial depositNo
Three-year fixed-term savings accountZenith Bank Three-Year Fixed-Term Deposit1.85%£1,000 minimum initial depositNo
Three-year fixed-term cash IsaUnited Trust Bank Three-Year Fixed-Term Cash Isa1.4%£1,000 minimum initial depositNo
Two-year fixed-term savings accountCharter Savings Bank Two-Year Fixed-Rate Bond1.62%£5,000 minimum initial depositNo

Source: Moneyfacts. Correct as of 18 January 2021, but rates are subject to change. *The account from Gatehouse Bank is Sharia-compliant, and so offers an expected profit rate (EPR) as opposed to interest (AER).

As the table shows, no cash Isas or savings accounts can beat the current rate of inflation.

What's more, at the time of writing, those who don't have at least £1,000 to save will be unable to secure a top-rate account.

Three of the accounts in the table require an even higher minimum deposit to open the account.

If you opt for a fixed-term option you'll need to make sure you can do without that money for the full term; some providers don't allow early access, while others will charge an interest penalty which will wipe out the benefit of saving for a longer term.

Are cash Isa rates gearing up for an 'Isa season'?

Analysis from Moneyfacts shows 2022 has begun with a flurry of competition from cash Isa providers vying to secure a top-rate spot at the top of comparison tables.

In the past, we've seen cash Isa rates rise in the months before the new tax year, with providers trying to attract savers' money - and it's a great time to secure a better rate than you'd get at another time of year. However, due to the Covid-19 pandemic, this hasn't really happened for the past couple of years.

Looking at how top rates have changed over the past couple of months, in November 2021 the highest rate paid on a five-year fixed-term cash Isa was 1.61% AER - this is now up to 1.75%.

If you fixed for three years in November, you'd be able to earn up to 1.31% AER - this is now up to 1.4%. The top rate on a one-year fixed-term cash Isa has risen from 0.96% to 1% since November.

This is encouraging since there are just a few weeks left of the 2021-22 tax year - savers' last chance to use up whatever is left of their £20,000 Isa allowance. Come 6 April, the allowance will be renewed for 2022-23, and you can't carry over any unused allowance.

How does CPI inflation affect your savings?

CPI inflation is the speed at which the prices of the goods and services bought by households rise or fall.

It tracks the costs of a shopping basket of around 700 popular goods and services bought by households - from milk to mini-breaks.

The figure - which is provided by the ONS each month - shows how much prices have changed compared with the same month of the previous year.

For example, if you'd bought all the same items in the basket in December 2020 and bought them all again the same month in 2021, you could expect your shop this year would be 5.4% more expensive.

When you keep money in your bank, you'll likely be earning interest, which should balance out the effects of inflation.

If your cash isn't growing in interest at the same rate of inflation or more, it will effectively lose value because you'll be able to buy less with it.

That's why you should ensure that your money is making the best return possible - even when savings rates are low.