Inflation rise means all savings are 'losing' accounts

The Office for National Statistics (ONS) revealed this morning the Retail Prices Index (RPI) inflation measure showed prices typically rose by 4.7% in the year to November, up from 4.5% in October (see the Top Savings guide).

The Consumer Prices Index (CPI) rate of inflation, which does not include housing costs so is less representative, was 3.3% last month, up from 3.2% in October.

As the interest on most savings, other than cash Isas, is taxed, a basic rate payer needs to earn 5.88% before the deduction to beat the current RPI figure, while a higher rate taxpayer must earn 7.83%.

Yet data provider Moneyfacts says no mass market account can even beat the 5.88% figure for basic rate taxpayers.

The top standard savings rate – for those willing to lock their money away for five years – is 4.5% before tax.

This makes it crucial to ensure your cash is in the best possible place to soften the inflation blow (see the Top Savings guide).

Some accounts can beat the inflation measure but only those that come with strict conditions, such as the need to hold an investment with that provider.

Even un-taxed cash Isas can't beat the 4.7% figure, other than a 5.5% account from Santander. Yet even that deal requires you to hold a Santander investment.

How does inflation affect savings?

People saving money keep it for a rainy day or a special purchase, but also to make that cash grow.

While it will grow even on a 0.01% interest rate, if prices rise by 4.7% in the coming year, your cash will buy you a lot less in 12 months than it does now.

Imagine you've £1,000 in the top 3% easy access savings account, after (basic rate) tax you'd have £1,024 in a year – as you've earned £24 interest.

Now suppose that £1,000 is enough for ten weekly supermarket trips. If prices rise by 4.7% next year, you'd need £1,047 to buy the same goods.

So although your savings might have grown, the impact of inflation means what you can buy with the money has fallen, meaning your cash is losing value, hence it is in a 'losing' account.

Inflation tracks the previous year's prices. Savers opening a new account are more interested in prices for the coming year, yet costs could soar further as VAT will rise on 4 January from 17.5% to 20%.

Inflation up

A record surge in both food and clothing costs drove up the rate of inflation in November, the ONS says.

The increase was driven by a 1.6% rise in food prices and 2% in clothing costs – the highest increases for both sectors in an October to November period since records began.

The figures will disappoint the Bank of England – tasked with bringing the rate of inflation down to a 2% target – although policymakers predicted a spike in the cost of living towards the end of the year.

Additional reporting by the Press Association.

Further reading/Key links

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