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16 Feb 2022

Inflation rises to 5.5% in January 2022: can any savings rates beat it?

NS&I's Green Savings Bonds have been given a significant interest rate boost

Inflation rose to 5.5% in January 2022, according to the latest figures from the Office for National Statistics (ONS) - partly due to price rises for motor fuels and second-hand cars.

The Consumer Prices Index (CPI) measure of inflation is up from 5.4% in December 2021 and is now the highest since March 1992.

CPI inflation tracks the cost of a 'shopping basket' that contains around 700 popular goods and services.

Here, Which? reveals why the inflation rate has changed, and how it compares with the top-rate savings accounts and cash Isas that are currently on the market - including NS&I's Green Savings Bonds which have been given a significant rate boost.

Why has inflation risen?

January's inflation rate was mainly caused by price rises for motor fuels, which had seen price drops between March 2020 and February 2021.

Second-hand car prices have also increased, as they've become increasingly sought-after since the start of the coronavirus pandemic.

Clothing and footwear prices also contributed to the inflation rise, as seasonal discounts are also being disrupted by the pandemic, and prices didn't fall in January 2022 by as much as they usually would.

The graph below shows how inflation has fared since January 2018, 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 effects of the coronavirus pandemic. However, it's been significantly above 2% since August 2021, and it's estimated that inflation will remain high for some time to come.

The base rate, which affects the costs of mortgages and the amount of interest paid on savings, has now risen twice since December in response to soaring inflation - and could be tweaked again if the Bank of England thinks it could help keep inflation down. The next decision on the base rate will be published on 17 March.

Can any savings rates beat CPI 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 equal or beat January inflation?
Five-year fixed-term savings accountJN Bank Five-Year Fixed-Term Savings Account2.12%£1,000 minimum initial depositNo
Five-year fixed-term cash IsaUnited Bank UK Five-Year Fixed-Rate Cash Isa1.76%£2,000 minimum initial depositNo
Four-year fixed-term savings accountJN Bank Four-Year Fixed-Term Savings Account1.95%£1,000 minimum initial depositNo
Four-year fixed-term cash IsaUnited Bank UK Four-Year Fixed-Rate Cash Isa1.51%£2,000 minimum initial depositNo
Three-year fixed-term savings accountAl Rayan Bank 36-Month Fixed-Term Deposit1.86% (EPR*)£5,000 minimum initial depositNo
Three-year fixed-term cash IsaUnited Bank UK Three-Year Fixed-Rate Cash Isa1.41%£2,000 minimum initial depositNo
Two-year fixed-term savings accountAl Rayan Bank 24-Month Fixed-Term Deposit1.66% (EPR*)£5,000 minimum initial depositNo

Source: Moneyfacts. Correct as of 15 February 2022, but rates are subject to change. *The accounts from Al Rayan Bank are Sharia-compliant, and so offer an expected profit rate (EPR) as opposed to interest (AER).

As the table shows, no cash Isas or savings accounts come anywhere close to beating the current rate of inflation.

The majority of the accounts featured here require at least £1,000 to open the account, which could be a problem for those who can't afford to lock that much away. Accounts that accept smaller deposits are available, but just don't offer the top rate.

It's also important to look out for other terms that could affect the interest you receive - particularly when signing up to a new instant-access account.

Some of these feature bonus rates that will reduce after a certain amount of time, while others - such as the account from Paragon Bank - only pay the advertised interest rate if you keep under a certain number of withdrawals per year. In this case, you have to stick to a maximum of three withdrawals, or the interest will be slashed to just 0.25%.

NS&I doubles interest rate on Green Savings Bonds

NS&I has doubled the interest rate on its Green Savings Bonds, which now offer 1.3% AER.

First launched in October 2021, the bonds have a three-year fixed-term and the money raised is used to fund environmentally-friendly projects to help the UK reach its net-zero greenhouse gas emissions target by 2050.

While the interest increase makes the bonds a far more attractive prospect than the previous 0.65% interest rate, they're still not market-leading.As the table above shows, the most competitive rate for a three-year fixed-term account is 1.86%.

That being said, you can open a Green Savings Bonds account with just £100 (much less than the £5,000 required for the top-rate three-year account) - and the environmental credentials might mean some savers think it's worth missing out on 0.56% interest.

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 boots to baking soda.

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 January 2021 and bought them all again the same month in 2022, you could expect your shop this year would be 5.5% 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.