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

Inflation fell to 10.1 per cent in the 12 months to March, down from 10.4 per cent in February.

Any dip is good news – although this one didn’t take inflation below double-digits as hoped – but it still means that consumer prices have risen by more than five times the Bank of England’s long-term target of 2 per cent over the past year.

It does, however, mean that the gap between the best savings rates and the rate of inflation has narrowed this month. 

Current CPI measure: 10.4% 

Best buy easy-access: 3.55% – Gap: 6.55 percentage points (down on last month)

Best buy one-year fix: 4.55% – Gap: 5.55 percentage points (down on last month)

Savers are continuing to see their cash pots eroded, as not a single standard account manages to pay even close to a CPI inflation-beating rate.

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

For two years, we have found not one single account that has managed to match of better inflation.

The best easy-access deal pays 3.55 per cent, the top one-year fix pays 4.55 per cent, whilst even the top longer term fix pays 4.6 per cent interest, some way off the current inflation measure.

Inflation: a brief explanation

Inflation is the rate at which costs rises. 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 this year, 19 items were added to the Consumer Prices Index and 15 items were removed.

Additions to the basket for 2023 include video doorbells, home security cameras, soundbars, electric bikes, wraps, tortillas, and frozen berries.

Removals from the basket include cooking apples, home-killed shoulder of lamb, DVDs, alcopops, and bottles of drink bought from vending machines.

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 upped the base rate from 4 per cent to 4.25 per cent. 

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. 

Some easy-access accounts with big banks still pay 1 per cent or less, whilst plenty of people keep large amounts of money in their bank account, often earning absolutely nothing.

With the current rate of CPI as of February now at 10.1 per cent, savers with cash in accounts such as these will be, in essence, shredding money.

Let’s say the rate of inflation comes in at 10.1 per cent this time the next year. That means what costs someone £1,000 today will typically cost them £1,101 this time next year. 

If they have £1,000 in a bank account today paying no interest, they’ll effectively be losing £101.

By stashing £1,000 in the best paying easy-access deal paying 3.55 per cent, they will at least reduce their loss to £65.50. 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.

Savers may have to wait until the end of this year for the interest they receive to finally start beating inflation, based on recent projections by the OBR. It is expecting inflation to fall to 2.9 per cent by the end of the year.

This means savers could potentially fix in a rate now and stand a chance of beating inflation.

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. Unsurprisingly, as inflation has soared the answer for some time now has been ‘none’.

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 2021 reading of 0.7 per cent. 

April 2021 was the last month in which there was a savings rate that actually beat the rate of inflation.

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.  

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

The advice to savers is to make the most of the best deals now before they disappear.

A spokesperson for the Savings Guru says: ‘We think that fixed rates have peaked and that the current rebound is being driven by the uncertainty in the markets but that it is temporary and will not be sustained. Those savers interested in fixed should get the best deals now.

‘Easy access rates probably have a little way to go. But easy access savers should still switch now – either to banks who are competitive and have a single easy access rate, so they’ll get the upside from any increases too, or to the best deals available currently but continue to monitor and switch again.’

This is Money says: Regardless of inflation, 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. 

The best easy-access deals, without any restrictions, pay north of 3 per cent. If you’re getting anything less than this at the moment, then switch to a provider that will do. 

Those with extra cash which they may need over the next two or three years should consider fixed rate savings.

Fixed rates offer the best returns at present. The best paying one-year fix pays 4.55 per cent, the best two-year fix pays 4.62 per cent.

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

Santander is offering a swathe of best buy cash Isa deals, including an online easy-access rate paying 3.2 per cent and a 18-month fix paying 4.25 per cent.

Savers can also opt for Yorkshire Building Society’s limited access account paying 3.35 per cent or Cynergy bank’s easy-access deal paying 3.28 per cent. 

For those with spare cash who won’t need the cash for five years or more, then investing 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.

The best savings to fight inflation 

The best one-year and two-year fixed rate deals pay 4.55 per cent and 4.62 per cent, courtesy of SmartSave Bank Al Rayan Bank. Both offer FSCS protection which means savers deposits are protected up to £85,000 per person.

As a Shariah-compliant bank, Al Rayan follows the laws and rules of Islam and is guided by Islamic economics.

Core Islamic principles include, not charging interest to borrow money and not paying interest on savings accounts.

Rather than listing interest rates, Sharia savings accounts therefore list how much profit savers earn through an ‘expected profit’ rate – though the outcome for savers is the same. 

Someone depositing £10,000 into the best one-year fix could expect to earn £455 in interest during that time.

Those who are looking for a fixed rate cash Isa in order to shield the interest they earn from the taxman may want to consider Santander’s 18-month deal paying 4.25 per cent.

In terms of easy access rates,  the savings app, Chip, is paying 3.55 per cent on balances up to £85,000.

All money deposited in Chip’s deal is held by ClearBank, and is eligible for the Financial Services Compensation Scheme up to £85,000 per person. 

After 12 months, someone stashing £10,000 into this account would therefore earn £355 if the rate remains the same.

Inflation watch: what is sending prices up?

In March, food price inflation accelerated, which may come as no surprise to anyone who has been near a supermarket recently. 

Prices are up 19.1 per cent in a year. Among the most hair-raising increases was olive oil up 49.2 per cent, low fat milk up 39 per cent, cheese up 34 per cent , and eggs up 32 per cent. 

Anyone who got a new furry friend during lockdown will be counting the cost, because the price of pet products is up an eye-watering 18 per cent in a year. Vet prices are rising slightly more slowly, at 12.4 per cent. 

However, the good news is this is set to be the final month of energy price inflation – with electricity prices up 67 per cent in a year and gas up 129 per cent. 

From April, the Energy Price Guarantee will still be in place – holding prices at £2,500 until July. But the even more positive news is that from that point, the energy price cap is expected to fall. 

Petrol prices also eased again, falling 1.2 pence per litre during the month – taking us to 146.8p for petrol and 166.5p for diesel, as the threat of global recession meant less demand for oil. 

It means annual price rises are now down 8.4 per cent in a year for petrol and 2.4 per cent for diesel. 

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown said: ‘Inflation remained horribly sticky in March, welded to double figures for the seventh consecutive month. 

‘While we’re expecting more falls to kick in from next month, some costs will keep rising, so the pain of inflation is far from over. 

‘It also means the Bank of England remains under pressure to keep a lid on inflation, so we can’t rule out another rate rise in May.

‘We’re still seeing both fixed rates and easy access rates creep up, and today’s figures may well see this continue in the immediate future. 

‘However, this isn’t going to last forever. We may still get one more rate rise from the Bank of England on the back of sticky inflation, but it’s reasonable to expect the rate rise cycle is drawing to a close.’