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13 Feb 2019

January CPI inflation plummets: what it means for your savings

Find the best savings accounts to beat inflation

The UK Consumer Prices Index (CPI) measure of inflation fell to 1.8% in January 2019, the Office for National Statistics (ONS) announced this morning.

This is down from 2.1% in December 2018, and is the lowest inflation rate since January 2017.

CPI is one of three inflation measures reported on each month, in addition to the Consumer Prices Index (CPI) and the Retail Prices Index (RPI) - which are at 1.8% and 2.5% respectively.

But why is RPI so different to CPI? And why are so many inflation measurements reported?

Much controversy surrounds the RPI statistic, and a recent report from the House of Lords Economic Affairs Committee has added to pressure for the government to drop it altogether.

Which? looks at how the measures of inflation work, and what they could mean for your savings.

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Why has inflation fallen?

The main factors behind the drop in inflation were falling prices for electricity, gas and other fuels, compared with price rises a year ago, the ONS explains.

Prices of food, non-alcoholic beverages, clothing and footwear have also been broadly in decline.

These falls were balanced out with rises in air fares, which have gone up in price since last year.

The graph below shows how CPI and RPI have fared since 2011.

As the graph shows, RPI and CPI do follow the same trend - but RPI tends to be significantly higher, which is part of the reason why the measurement has been causing controversy.

Why is the future of RPI in question?

In a recent report, the House of Lords Economic Affairs Committee set out a few issues with the government's use of the RPI measure of inflation.

Both CPI and RPI are based on a fixed basket of goods and services, many of which are the same. RPI, however, excludes the highest-earning and pensioner households, as well as spending by foreign visitors, and the spending data used is different from CPI.

The main problem with RPI is that it may be inaccurate by up to 0.8%, according to the committee report - mainly due to the improved way the wide-ranging price of clothing can now be tracked.

The committee also raised concerns that the government cherry-picks the inflation rate it wants to use.

Things which benefit taxpayers, such asbenefits increases, tax threshold rises and state pension rate rises, are usually linked to CPI inflation. But when it comes to rates we pay, such as train fare increases and student loan interest, RPI is often used.

The Economic Affairs Committee has called for just one measure of inflation to be used, to avoid any confusion or unfairness.

How does CPI inflation affect savings?

CPI inflation tracks the cost of an imaginary 'shopping basket' of around 700 popular goods and services.

Each month's inflation figure shows how much the shopping basket costs compared to how much you'd have spent in the same month of the previous year.

So, if your savings are sitting in an account that doesn't match or beat the rate of inflation, your money will be losing value in real terms.

As goods and services become more expensive, you won't be able to buy as much with the same amount of money.

So, going by the CPI rate of inflation, if your savings account pays less than 1.8%, you might want to consider switching.

Currently, only fixed-rate savings and cash Isa accounts can beat the rate of inflation.

Find out more:how to find the best cash Isa

How many accounts can beat CPI inflation?

Currently, all top-rate fixed-term savings accounts can beat inflation, and cash Isas with two to five-year fixed-rates can, too.

The table below shows the top-rate fixed-term and instant-access savings accounts and cash Isas. We've ordered the table by longest fixed rate and provided the top deal for fixed-rate savings accounts and cash Isas.

Account typeAccountAERTerms
Five-year fixed-rate savings accountBank of London & The Middle East five-year premier deposit account2.7% EPR*£10,000 minimum initial deposit
Five-year fixed-rate cash IsaCharter Savings Bank five-year fixed-rate cash Isa2.26%£1,000 minimum initial deposit
Four-year fixed-rate savings accountVanquis Bank four-year fixed-rate bond2.52%£1,000 minimum initial deposit
Four-year fixed-rate cash IsaHodge Bank four-year fixed-rate cash Isa1.8%£1,000 minimum initial deposit
Three-year fixed-rate savings accountAl Rayan Bank 36-month fixed-term deposit2.52% EPR*£1,000 minimum initial deposit
Three-year fixed-rate cash IsaCharter Savings Bank three-year fixed-rate cash Isa1.91%£1,000 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 12 February 2019. 

As the table shows, in order to beat the rate of inflation, you'll need to commit to locking your money away in a fixed-rate savings account for at least a year, or in a fixed-rate cash Isa for at least two years.

If you need to access your cash, or cannot afford the minimum initial deposit of £1,000 plus required from all of the top-rate accounts that beat inflation, you'll have to look for a lower rate and different account terms, such as an instant-access account.

Find out more:how to find the best savings account

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.

Instant-access accounts

If you want to access your savings, RCI Bank's Freedom Savings Account pays 1.42% AER, and requires a minimum initial deposit of £100. Customers ranked it highly for customer service and keeping regular contact.

Kent Reliance also has an easy access account paying 1.4% AER, requiring a minimum initial deposit of £1,000. The bank scored highly with customers for its interest rate information.

Fixed-rate accounts

If you're able to lock your money away for between one and five years, you could consider a fixed-rate account.

Leeds Building Society has a five-year fixed-rate account with 2.1% AER paid on deposits between £100-£1m.

RCI Bank's three-year fixed-rate account pays 2.36% AER, but requires a minimum initial deposit of £1,000.

You could also consider the Kent Reliance one-year fixed-term bond, which offers a 1.7% AERreturn when you pay in a minimum initial deposit of £1,000.

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? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.