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

Products featured in this article are independently selected by This is Money’s specialist journalists. If you open an account using links which have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence.

Inflation rose again to 11.1 per cent in the 12 months to October, up from the 10.1 per cent rise in the cost of living recorded in September.

It means that consumer prices are rising by more than five times the Bank of England’s long-term target of 2 per cent.

Current CPI measure: 11.1% 

Best buy easy-access: 2.81% – Gap: 8.29 percentage points (up on last month)

Best buy one-year fix: 4.45% – Gap: 6.65 percentage points (up on last month)

Keeping an eye on inflation is key to knowing whether or not your savings are being eaten away by inflation

Keeping an eye on inflation is key to knowing whether or not your savings are being eaten away by inflation

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 18 months now, we have found not one single account that has managed to match of better inflation.

The best easy-access deal pays 2.81 per cent, the top one-year fix pays 4.45 per cent, whilst even the top five-year fix pays 5 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 millenium, 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.

Best accounts at a glance 

There are none that beat inflation this month, however, make sure you shop around for the best returns possible.

Easy-access: Al Rayan Bank – 2.81%

One-year fixed-rate: Kent Reliance – 4.5%

Two-year fixed-rate: RCI Bank – 4.8% 

Five-year fixed rate: Tandem Bank* – 5% 

Easy-access cash Isa: Skipton BS – 2.75% 

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. 

Inflation vs the base rate and savings 

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.

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 as little as 0.2 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 in October now 11.1 per cent, savers with cash in accounts such as these will be, in essence, shredding money.

Let’s say inflation averages 11.1 per cent over the next year. That means what costs someone £1,000 today will typically cost them £1,110 this time next year. 

If they have £1,000 in a bank account today paying no interest, they’ll effectively be losing £110. 

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. 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. 

How many savings accounts beat the latest inflation reading? 
Account  Number of inflation-beating deals this month  Number of inflation-beating deals last month
Current accounts 0 0
Easy-access accounts 0 0
Notice accounts  0 0
0-23 month fixed-rate bonds  0
2-year fixed-rate bonds  0 0
3-year fixed-rate bonds  0 0
4-year fixed-rate bonds  0 0
5-year fixed-rate bonds  0 0
Total  0 0
Source: Savings Champion (figures correct as of 16/11/2022) 

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.  

Easy-access returns: This graph illustrates the real annual return on instant access accounts between 1966 and 2022

Easy-access returns: This graph illustrates the real annual return on instant access accounts between 1966 and 2022

Easy-access returns: This graph illustrates the real annual return on instant access accounts between 1966 and 2022

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

But the top rate of 4.65 per cent seen last week on popular one-year bonds has vanished, with some accounts on sale for just 24 hours.

This has led some to suggest that fixed rate savings deals have now peaked. 

Rachel Springall, finance expert at Moneyfacts.co.uk, said: ‘Savers will find providers have reviewed their table-topping cash interest rates in recent weeks, with notable attention made to fixed rate bonds and Isas. 

‘Since the last inflation announcement, some of the top fixed rate bonds have seen reductions but further adjustments could be set to come. 

‘Savers may need to act with pace if they wish to take advantage of the current rates on offer. 

‘Inflation is still way above the Government’s target of 2 per cent and it is eroding cash in real terms at its present level, but this should not discourage savers from comparing rates and switching to a better deal.’

While interest rates on savings accounts might make it seem like the value of your account is increasing, inflation could be causing your savings to lose value in 'real terms'

While interest rates on savings accounts might make it seem like the value of your account is increasing, inflation could be causing your savings to lose value in 'real terms'

While interest rates on savings accounts might make it seem like the value of your account is increasing, inflation could be causing your savings to lose value in ‘real terms’

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 2.4 per cent. If you’re getting anything less than this at the moment, then switch to a provider that will does. 

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 4.45 per cent, the best two-year fix pays 4.85 per cent whilst the best three-year fix pays 4.9 per cent, for example.

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.

This year is set to be one of only four years in the last 20 in which shares have performed worse than cash savings, 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. 

The best savings to fight inflation 

The best one-year fixed rate deal pays 4.45 per cent, courtesy of Kent Reliance whilst the best two-year fix pays 4.85 per cent – both are courtesy of RCI Bank.

Someone depositing £10,000 in RCI’s two-year fix could expect to earn £993 in interest during that time.

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 account is currently offered by Family Building Society. It offers a 90-day notice account paying 3.1 per cent. 

Although savers can get 3.2 per cent with OakNorth Bank – albeit with a 120 day notice period attached. 

There are now a selection of six and nine-month fixed deals that could also make for the perfect halfway house for savers. 

These accounts offer higher returns than easy-access rates and notice accounts, but don’t require people to lock their cash away for years at a time. 

The savings platforms Raisin UK* and Hargreaves Lansdown’s Active Savings* are home to the highest short-term fixed rates on the market at present.

Hargreaves Lansdown’s platform is offering a nine-month deal paying 3.77 per cent – courtesy of Aldermore.*

Raisin UK’s platform is offering a nine-month deal paying 3.75 per cent* and a six-month deal paying 3.38 per cent.*

Saver deposits are protected up to £85,000 per individual under the FSCS via all the providers on both platforms.

In terms of easy access rates, Al Rayan Bank is the best buy paying 2.81 per cent.

For those seeking a more familiar provider, Aldermore is currently offering an easy-access deal paying 2.75 per cent.

Inflation watch: what is sending prices up?

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. 

Households are now paying 88.9 per cent more for gas and electricity than a year ago. 

It was groceries in particular this month however that helped fuel inflation even higher.

Food and non-alcoholic drink rose 16.4 per cent in a year. The rate of food inflation has accelerated every month for the past 14 months, and hit a 14-year-high.

Despite the ONS confirming that inflation has now reached the highest level since 1981, there is glimmer of hope that rises may soon begin to soften. 

Kevin Brown savings specialist at Scottish Friendly said: ‘Prices are now rising faster than they have since 1981 due to the cost of fuel, food and drink and transport all spiking again last month. 

‘It’s a bigger jump than was expected and it will raise fears that inflation has not yet reached its peak. However, there are still some early signs that price increases may soon begin to soften.

‘Core inflation which excludes energy, food, tobacco and alcohol did not rise in October and remained flat at 5.8 per cent. 

‘This provides a small glimmer of hope that the cost-of-living crisis may start to fade slightly sooner than previously expected.

‘Nonetheless, households are still vulnerable to fluctuating gas and electricity prices and rising mortgage and borrowing costs could offset any reduction families see in other areas next year.

‘The pressure on households’ disposable income isn’t suddenly going to let up, so it’s important that people try to put away any extra money they do have when the opportunities arise. 

‘That might mean saving into cash for easy-access, or if it’s for the future, investing some of it as that at least offers the possibility of above inflation returns.’

Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.

.