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15 Sep 2021

Inflation soars to 3.2% in largest monthly rise on record - do any savings rates beat it?

Which? reveals where to find the best savings rates

Inflation rose to 3.2% in August 2021, according to the latest figures from the Office for National Statistics (ONS), partly due to a rise in the cost of dining out, petrol and used car prices.

The Consumer Prices Index (CPI) measure of inflation is up from 2% in July 2021. CPI inflation tracks the costs of a 'shopping basket' containing around 700 popular goods and services.

The increase, of 1.2 percentage points, is the largest ever recorded monthly increase since the ONS began recording the data in January 1997.

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

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Why has inflation risen?

The ONS says that the large increase is 'likely to be a temporary effect', due to artificially suppressed prices during lockdown.

A primary factor that caused August's inflation rise was discounted meals this time last year under the government's Eat Out to Help Out scheme, which offered customers half-price food and drink (up to the value of £10) between Mondays and Wednesdays.

The transport sector also contributed to the surge in prices, with petrol prices rising by more than 20p per litre, on average, compared with August 2020.

An increased demand for second-hand cars also contributed to rising prices, due to a reported shortage in new models over recent months.

In addition, the ONS says that there are anecdotal reports that shortages of supply chain staff and increased shipping costs, coupled with demand increases following the lifting of national lockdowns are driving food price inflation.

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

The Bank of England has been tasked with keeping inflation as close to 2% as possible, meaning it's not met its target for August.

May 2021 was the first time it's exceeded 2% since July 2019. Inflation had measured at 1.5% or less from March 2020 to April 2021 due to the economic effects of the pandemic.

Do any savings rates beat inflation?

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

Account typeAccountAERTermsDoes this account equal or beat August inflation?
Five-year fixed-term savings accountAtom Bank Five-Year Fixed Saver1.86%£50 minimum initial depositNo
Five-year fixed-term cash IsaUnited Bank UK Five-Year Fixed-Term Cash Isa1.46%£2,000 minimum initial depositNo
Four-year fixed-term savings accountJN Bank Four-Year Fixed-Term Savings Account1.74%£1,000 minimum initial depositNo
Four-year fixed-term cash IsaUnited Bank UK Four-Year Fixed Rate Cash ISA1.36%£2,000 minimum initial depositNo
Three-year fixed-term savings accountAl Rayan Bank 36-Month Fixed Term Deposit1.81%£5,000 minimum initial depositNo
Three-year fixed-term cash IsaSecure Trust Bank Three-Year Fixed Rate Cash Isa1.25%£1,000 minimum initial depositNo
Two-year fixed-term savings accountAl Rayan Bank 24-Month Fixed Term Deposit1.76%£5,000 minimum initial depositNo

Source: Moneyfacts. Correct as of 14 September 2021, but rates are subject to change. The accounts from Al Rayan Bank are a sharia-compliant product and so offers an expected profit rate (EPR) as opposed to interest (AER).

As the table shows, no top-paying accounts currently on the market can equal or beat the August rate of CPI.

There are only two accounts that can be opened for £1 or less. A third of them require you to lock away at least £1,000. For a fixed-term account, you'll need to be sure you can do without the money for the full term - accessing the cash early will usually result in a withdrawal penalty or won't be allowed.

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 such as clothing and food.

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 August 2020 and bought them all again the same month in 2021, your shop this year would be 3.2% 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.

Save with a Which? Recommended Provider

You can search through hundreds of savings accounts and cash Isas with Which? Money Compare.

The comparison site shows the interest rate and terms of an account, as well as how providers have been rated in our latest savings survey and whether they have been named Which? Recommended Providers (WRPs).

WRPs 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.