How much inflation is costing you – and what you should do about it
Inflation has fallen for the third month in a row, but still exceeds rates offered by almost all savings accounts, in a blow to savers whose hard-earned cash continues to lose value.
As our calculator below will show you, finding the best-paying savings account is essential to limiting the hit to your savings from inflation.
The Consumer Prices Index rose by 6.8pc in the year to July, down from 7.9pc in June.
So-called “core inflation” is the biggest worry right now, which stuck at 6.9pc in July – the same as the month before. This strips out volatile measures like food and energy prices, and has previously forced the Bank of England to hike the Bank Rate in a bid to get it under control.
While the inflation reduction is a good start, the Bank of England still increased the Bank Rate to 5.25pc at its most recent meeting.
Markets now predict interest rates will peak around 5.7pc in March next year, slightly lower than the 6.25pc peak predicted before the latest inflation figures were released.
Calculate your losses
The toll on your savings is only being made worse by some banks’ failure to pass on interest rate rises, following increases in the Bank Rate from 0.1pc to 5.25pc since December 2021.
While no bank is offering interest that can match inflation, you can mitigate the scale of the damage by switching to a better savings rate.
To spur you into action, Telegraph Money has devised a calculator that tells you, in pounds and pence, just how inflation is damaging your wealth.
You can put in the value of the deposit and the savings rate, and the calculator will tell you how much interest you can expect to get, the cost of inflation and what the real-terms value of your savings will be after a year.
It will also show you what the cumulative impact of these losses will be for each of the next five years in an extreme case where inflation stays at the same level it is now.
You can use the calculator to see how much of a difference it would make to switch savings accounts for a better rate.
Someone with £20,000 in the average easy-access account paying 2.91pc will suffer a “real terms” loss of £925 a year because of inflation. They would earn £582 in interest and their pot would effectively be worth just £19,075 after a year when adjusted for inflation.
Switching to the top easy-access savings rate, which is from Oxbury Bank and pays 4.8pc, would reduce their annual loss to £575 – a difference of £350.
They would receive £960 in interest, with their pot worth £19,425 when adjusted for inflation.
Are Isas a smart move?
Isas are another option but the savings are capped to £20,000. You can use our savings tax calculator to work out whether you could save money by switching to an Isa, which is tax-free.
Basic-rate taxpayers can earn £1,000 on their savings before having to pay tax, while higher-rate taxpayers can earn just £500.
Someone with £20,000 in the top easy access Isa paying 4.43pc from Shawbrook Bank would lose £643 in a year because of inflation, reducing the value of their savings to £19,357 in real terms.
But if they switched to the top rate on the market – 5.77pc from UBL UK for a one-year fix – they would only lose £395 because they will be cushioned by higher interest payments. Their pot would be worth £19,605 in a year, with interest of £1,154.
To get better returns, you can lock your money into a fixed-rate savings account for at least one year – although your interest will be taxable.
This article is kept updated with the latest rates.
