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

Inflation plummeted to 1.7 per cent in the 12 Months to September down from 2.2 per cent in the 12 months to August,ONS figures reveal. 

It came in lower than expectations and marks the first time inflation has fallen below 2 per cent in over three years. This is now the lowest level of inflation in over three years.   

Inflation finally hit the Bank of England’s target of 2 per cent in May, meaning prior to today’s reading, inflation reached its lowest level since July 2021 and was well below the peak of 11.1 per cent in October 2022. It ticked up again to 2.2 per cent in July. 

Today’s lower inflation figure was largely pushed down by lower air fares and falling prices at the pump.

We look at what it means for your savings now that inflation has dipped to 1.7 per cent. 

Core inflation (stripping out energy, food, alcohol and tobacco) came in at 3.2 per cent in the 12 months to September, falling slightly from last month’s 3.6 per cent. 

Thie is very good news for savers as nine in 10 savings accounts now beat the rate of inflation, according to rates monitor Moneyfacts Compare. This means the vast majority of savings accounts now beat the rate of inflation. 

There are now 1,731 savings accounts which beat the rate of CPI inflation, figures from Moneyfacts show. This is up from 1,606 last month. 

This includes 313 easy-access accounts, 166 notice accounts, 235 variable rate Isas, 307 fixed-rate Isas and 688 fixed-rate bonds.

The best easy-access account outpaces inflation by 3.3 per cent. This was 2.67 per centage points in the 12 months to August. 

While the gap between the best fixed-rate deal and the rate of inflation is 3.3 percentage points, up from 2.76 per cent in August. 

Current CPI measure: 1.7%

Best buy easy-access: 5% – Gap: 3.3 percentage points

Best buy one-year fix: 5% – Gap: 3.3 percentage points  

Savers won’t see their cash pots eroded as savagely with inflation at this level, as there are at least 1,558 standard accounts which bridge the gap between CPI inflation.

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

In November, when inflation fell to 3.9 per cent, we found 967 standard accounts that could bridge the gap between CPI inflation.  

For more than two years before a surprise fall in inflation arrived in November 2023, This is Money could not find not a single account that managed to match or better inflation.

But now the best easy-access deal pays 5 per cent interest and the best one-year fix also pays 5 per cent – both beating the current inflation measure by a wide margin. 

Some regular savers do pay a headline rate of up to 8 per cent – but we don’t count these. That’s because interest is calculated on the growing balance and means they don’t technically beat inflation.

For example, if you were to stick in the maximum £200 allowed monthly into Nationwide and its 8 per cent regular saver, you’d end up with £104 interest, which is the equivalent of 4.33 per cent of the balance.  

Inflation: a brief explanation

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

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.

To do this, every month, a team of roughly 300 analysts visit 20,000 shops in 141 different locations recording around 180,000 price quotes in the process.

CPI replaced the old retail prices index measure of inflation as a national statistic at the turn of the millennium, but RPI is still used for some official calculations and some people prefer it as a long-run measure. You can check how prices have changed over the years with our inflation calculator. 

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 2024, 16 items were added to the Consumer Prices Index and 15 items were removed.

Additions to the basket for 2024 included air fryers, vinyl records, gluten-free, rice cakes and spray oil.

Removals from the basket included hand sanitiser, sofa beds, rotisserie cooked hot whole chicken and bakeware. 

Inflation vs the base rate and savings 

The Bank of England uses the rate of inflation to determine whether to raise or lower its base rate in the hope people will borrow or spend more. Last month, it finally opted to cut the base rate to 5 per cent after holding the base rate at 5.25 per cent since August 2023. 

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.

To make matters worse, many savers are failing to make the best of a bad situation by leaving their savings languishing in accounts paying next to nothing. 

Rates monitor Moneyfacts Compare is now urging savers to switch as the top savings rates are fluctuating and savers may be able to find a better deal with online providers. 

Some easy-access accounts with big banks still pay less than 2 per cent, whilst plenty of people keep large amounts of money in their bank account, often earning absolutely nothing.

With the current rate of CPI now at 2 per cent, savers with cash in accounts such as these will be in essence shredding money.

As an example, let’s say the rate of inflation comes in at 2 per cent this time next year. That means what costs someone £1,000 today will typically cost them £1,020 this time next year. 

If they have £1,000 in a bank account today paying no interest, they’ll effectively be losing £22.

By stashing £1,000 in the best paying easy-access deal paying 4.91 per cent, they will be around £27 better off. Albeit, if all things remain the same. 

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 Moneyfacts Compare which reveal how many current savings deals beat the latest available inflation reading from the Office for National Statistics. 

Unsurprisingly, as inflation has soared over the last three years, the answer for some time now was ‘none’ until November 2023. 

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: 1,731

It should come a relief to savers that there are now 1,731 general savings deals that currently beat inflation. In June, there were 1,606 accounts that could beat inflation.

For two years, between April 2021 and November 2023, there were zero savings accounts which actually beat the rate of inflation. So 1,731 accounts now is a huge improvement. 

The most important thing for savers to do at the moment is to find the best savings rate they can, and if that means switching they should be prepared to do this. 

The closer your savings rate is to the rate of inflation, the less value your cash will lose over time. That’s why you should ensure that your money is getting the best interest rate possible. 

In recent months, savers have faced a dilemma over whether to fix or wait for better rates to come along.

The advice to savers has been to keep on top of the changing market if they want to secure a competitive deal.  

Caitlyn Eastell, of Moneyfacts Compare, said: ‘It is crucial savers keep on top of the changing market and make the switch to ensure they are not getting a raw deal, especially as we have seen some of the top rate deals drop below 5 per cent. 

‘It would not be too surprising to see more providers adjusting their rates in reaction. Since the previous inflation announcement, fixed rates have faced further reductions, so it may be wise for savers to begin considering locking into an interest rate while the majority continue to pay competitive returns. 

‘Longer-term rates have suffered the most, seeing drops as large as 0.31 per cent for a five-year term month-on-month. Although, typically, base rate cuts usually impact variable rates, we have been seeing an increasing number of providers lowering rates on accounts offering fixed returns.’

This is Money says: Moving your money to a new savings account is much easier than many people think.

It can all be done online and setting up an account can often take less than 10 minutes.

So our advice is simple. Don’t be loyal to your bank or savings provider. Be proactive and hunt for the best rates using our independent best buy tables.

When it comes to choosing an account. It’s always worth keeping some money in an easy-access account to fall back on as and when required.

Most personal finance experts believe that this should cover between three to six months worth of basic living expenses. 

Some easy-access deals, without any restrictions, pay just under 5 per cent, but are disappearing fast. If you’re getting anything less than this at the moment, consider switching to a provider that will give you these rates. 

Those with extra cash which they won’t immediately need over the next year or two, could consider fixed-rate savings.

Longer-term fixed rate deals have peaked and now that the base rate has been cut to 5 per cent, the top fixed bond rates have reduced Moneyfacts Compare warns. So savers wishing to secure one need to move quickly. .’

The best one-year fixed rate account pays 5 per cent and is offered by Union Bank of India, while the best two-year fix from Atom Bank pays 4.6 per cent.

Savers should also consider using a cash Isa to protect the interest they earn from being taxed.

Aldermore Bank is offering a one-year fix paying 4.56 per cent, and Hodge Bank has a two-year deal paying 4.41 per cent.

Savers can also opt for Trading 212’s easy-access account* paying 4.92 per cent.

– Check out the best cash Isa rates here. 

For those with spare cash who won’t need it for five years or more, investing it in the stock market may be the most sensible option to counter the inflation impact.

Money invested has outperformed money saved in four of the last 20 years, according to research by Janus Henderson.

A bad year might put some nervous investors off, but ultimately it won’t mask the fact that investing outperforms cash over the long term. 

– Read our guide on how to choose the best (and cheapest) stocks and shares Isa and the right DIY investing platform.