Best inflation-fighting savings rates: Make your money work harder

Inflation fell for the first time in a year to 9.9 per cent in August, marginally down from 10.1 per cent in July.

However, it still means that consumer prices are rising by almost five times the Bank of England’s long-term target of 2 per cent.

Inflation is the rate at which prices rise. For example, if the average pint of milk rises from 60p to 66p over 12 months, then milk inflation is 10 per cent.

Current CPI measure: 9.9% 

Best buy easy-access: 2.1% – Gap: 7.8 percentage points (down on last month)

Best buy one-year fix: 3.4% – Gap: 6.5 percentage points (down on last month)

The consumer prices index measures the average change in prices of roughly 730 core goods and services over time, including transport, food, and medical care.

Savers are continuing to see their cash pots eroded, as not a single standard account manages to pay a CPI inflation-beating rate, This is Money’s research reveals.

Each month we search for the best savings accounts to use to protect the value of your money in real terms. 

Over the past 12 months we have found not one single account that has managed to match of better inflation.

The best easy-access deal pays 2.1 per cent, the top one-year fix pays 3.4 per cent, whilst even the top five-year fix pays 3.75 per cent interest, some way of the current inflation measure.

However, with savings rates having improved over the past month, the gap between the best easy access savings rates and the best fixed rate savings deals and the rate of inflation has at least reduced. 

Inflation vs savings

The truth is, there’s no such thing as a single rate of inflation. Everyone will have their own because people buy different goods and services from an array of shops and sellers.

The changing price of dog food, for example, is not going to be relevant to someone who does not have a four-legged companion.

Instead, Britain’s national statisticians aim to create a representative basket of goods broadly reflective of the nation’s shopping habits.

This basket, which is used to calculate what we know as ‘the rate of inflation’, or the Consumer Prices Index, is updated once a year to reflect changing tastes. 

For example, at the start of this year, 19 items were added to the Consumer Prices Index and 15 items were removed.

Additions to the basket for 2022 include meat-free sausages, canned pulses, sports bras, pet collars and antibacterial surface wipes.

Removals from the basket includes doughnuts, men’s suits and coal.  

The CPI, or a version of it, is used by the Bank of England to determine how effective it is at keeping inflation around its target of 2 per cent. 

The Bank uses the rate of inflation to determine whether to raise or lower its base rate, in the hope people will borrow or spend more.

And while the base rate doesn’t quite determine mortgage or savings rates quite as often as it used to, inflation is very important for everyday savers too. 

After all, if the rate paid on savings is below the CPI, savers are almost certain to be losing money in ‘real’ terms.

And sadly, this is something that is relatively common. Not only are savings rates low, but those being paid them often fail to switch to a better-paying account.  

Some easy-access accounts with big banks still pay as little as 0.01 per cent.

With the current rate of CPI in August now 9.9 per cent, savers with cash in accounts such as these will be, in essence, shredding money.

The ‘real’ value of that £10,000 would shrink by more than £900 after interest and inflation were calculated after a year if your money is parked at such a low rate. 

That’s why it’s important to ensure savers are earning the best rate on their cash savings that they can be.

Each month This is Money publishes figures from the analysts Savings Champion which reveal how many current savings deals beat the latest available inflation reading from the Office for National Statistics.

Coupled with our independent best buy savings tables, this should give savers all the information they need to find the hardest-working home for their cash. 

Savings accounts that currently beat inflation: 0

There are no general savings deals that currently beat inflation.  

This makes for bleak reading when you consider that although savings rates were much lower, there were 367 deals beating the February 2021 reading of 0.4 per cent, and 115 beating March’s reading of 0.7 per cent.

As a result, these are tough times for savers. The best thing they can do is simply to find the best rate they can and avoid losing any more money in real terms, or consider investing excess cash in the hope of better returns.

Rachel Springall, finance expert at Moneyfacts, said: ‘Savers’ cash is still being eroded in real terms due to the current level of inflation, but this should not deter consumers from reviewing their existing rate and being proactive to switch. 

‘Since the last inflation announcement, top rates have continued to improve and savers who are looking at one-year fixed bonds will find they can now earn more than 3 per cent. 

‘Challenger banks have made a positive impact on the top rate tables, but due to continued competition, savers will need to keep on top of the ever-changing market to take advantage.’

This is Money says: Savers may well think that locking their money away for several years might act as a so-called ‘hedge’ against inflation, but with the future outlook on both savings rates and price rises so uncertain, it is best to retain some flexibility at the moment.

For example, the best rate to fix for five years is 3.75 per cent – not much more than a third of the current rate of inflation.    

There is not much of a premium for locking money away for longer than a year at the moment, so those keeping their money in cash might well be best off locking some away for up to 12 months to benefit from a better rate and the certainty, while keeping the rest in the highest-paying easy-access or short-term notice account they can find. 

The best savings to fight inflation 

The best one-year deal pays 3.4 per cent. Only 0.35 percentage points less than the best five-year deal.

Another option for savers is to consider a notice account. This is a halfway house between a fixed rate deal and an easy-access account.

It will allow savers to add funds as and when they need and withdraw their cash – albeit with a notice period.

The best notice savings deal is currently offered by BLME. It offers a 90-day notice account paying 2.52 per cent. 

The best one year fixed rate savings deal is also from BLME at 3.4 per cent.

Gatehouse Bank pays 3.15 per cent and you cn get an extra £25 boost via the savings platform Raisin using this link*.

It offers savers the chance to boost their savings by £25 when they open and fund an account on its marketplace with a minimum of £10,000. 

In terms of easy access rates, Al Rayan Bank is paying 2.1 per cent – albeit savers will need £5,000 to open an account.

Inflation watch 

Rising energy bills, motor fuel prices, used cars, as well as other goods and services including food, clothing and footwear, have all combined over the past year to cause the spike, according to the ONS. 

However, whilst much of this still applies, a fall in fuel prices has helped to at least apply the brakes on inflation accelerating further. 

Following July’s record increase, petrol prices fell back 14.3p per litre between July and August, so while the annual inflation for petrol was still 30 per cent, it had eased from 43 per cent a month earlier. Likewise, diesel had eased to 36 per cent, down from 46 per cent a month earlier. 

However, food and non-alcoholic drink played a major part in pushing prices northward, seeing their 13th consecutive month of rising inflation. 

They were up 13.1 per cent in a year, including some painful rises in the price of some essentials including low fat milk – which was up more than 40 per cent, and butter, whole milk, and jam – up almost 30 per cent. 

April’s huge hike in energy prices are taking their toll as time goes on. When it’s added to the rise last October, it means the cost of gas has almost doubled in a year, and electricity prices are up by around half.  

There have been some big rises in prices of some staples including pasta up 24.4 per cent, low fat milk up 34 per cent and butter and margarine up 27 per cent. 

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown said: ‘Runaway inflation has paused for breath, after petrol prices pulled back in August. 

‘It feels like better news for anyone who has been wrestling with higher prices, but because petrol has driven the change, it offers little relief for those on lower incomes. 

‘This hasn’t eased the pressure on lower earners. Petrol prices tend to be more of a concern for those on higher incomes, who may own more cars, drive more, and favour bigger gas-guzzlers. 

‘Meanwhile, those on the lowest incomes, who are suffering the most as a result of rising prices, are still facing impossible energy bills and horrible hikes in the cost of food.

‘Looking ahead, inflation is unlikely to be as bad as had been predicted before the Energy Price Guarantee. 

‘This will particularly benefit those who spend more on energy – which includes more higher earners – but will mean the horrendous hikes that had been announced for October won’t materialise. It’s likely to mean inflation peaks lower and sooner than had been predicted.’

Moneyfacts figures show that the average 1-year bond has reached a ten-year high of 2.29 per cent, and the average easy access rate has risen to 0.84 per cent.

Coles adds: ‘To help close the gap on inflation, any money you need for planned expenses in the next five years still needs to be in savings, but can be fixed in return for more interest. 

‘Right now, the short-term fixed-rate market is offering particularly competitive deals, as smaller and newer banks compete hard for your one-year fixed term savings, so you can make almost 3.5 per cent in these accounts.

‘You might be hesitant to fix at a time of rising rates – especially given that the Bank of England is expected to increase the base rate next week. 

‘However, trying to find the perfect time to fix is notoriously difficult. A rate rise will be priced into savings deals right now, so changes are more likely to be driven by individual banks boosting their accounts to attract more cash, persuading their competitors to inch their rates up too. 

‘It means there’s no big bang, where overnight all the deals get better, so there’s no one day on which to cash in on higher rates. 

‘And while you’re hanging on for a better offer, your money will be sitting in a less rewarding easy access account, losing even more money after inflation.’