Inflation hit 5.2% in September - its highest rate since 1992 - meaning savers face seeing the value of their nest eggs eroded.
Although inflation is now starting to slow, falling to 4.5% in October, it remains well above its 2% target. High inflation is bad news for consumers, as it has a corrosive impact on buying power. And for savers it means that every pound you put away will not go as far as it once did.
In order to beat rising inflation, savers must earn enough interest on their pennies so that, after tax, it is at least equal to inflation.
Currently, the Consumer Price Index (CPI) – which the government uses as the official measure of inflation – stands at 4.5%, while the Retail Price Index (RPI) – which includes mortgage repayments – stands at 4.7%.
Inflation - plus the fact that savings are taxed - mean it near impossible to earn interest on money at the moment.
Michelle Slade, analyst at Moneyfacts, warns that savers are going to struggle to find an account that beats inflation at the moment.
And Andrew Hagger, spokesman for Moneynet, says: “Consumers are suffering enough already as a result of the credit crunch and extremely tough economic climate, however they need to seek a decent home for their savings as well, otherwise their spending power will only be eroded further."
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Obviously, current interest rates on saving accounts will not protect your savings from inflation if you are a higher-rate taxpayer. But that doesn’t mean you have to sit back and watch your hard-earned, hard-saved money erode in value.
Mountford says the best option for most higher-rate taxpayers is to use their £3,600 ISA allowance, which will protect their savings from tax.
Although the ISA allowance is capped at £3,600, there are accounts on the market that allow transfers from previous years and still offer competitive rates.
To find the best ISA rates currently on the market, read our daily guide to the best fixed and variable ISAs on the market.
Higher inflation puts a new attraction on saving accounts that are linked to inflation.
This type of account promises to pay a set interest rate about the RPI.
According to Moneyfacts, there are currently four inflation-linked accounts on the market, two from the Leeds Building Society and two from National Savings & Investments (NS&I).
Leeds Building Society offers an Inflation Buster ISA and savings bond, that both pay 2.5% above RPI. However, bear in mind this is calculated on the rate on inflation on 30 April 2009 in year one and 30 April 2010 in year two.
It is hard to know how inflation will look in the future, and if the Monetary Policy Committee succeeds in its mission in bringing inflation down to 2% over the next two years then savers might find the interest rate they achieve doesn’t live up to their expectations.
NS&I offers two inflation-beating certificates, that both pay 1% above RPI with interest paid on maturity. The terms are either three-years or five-years.
Rachel Thrussell, head of savings at Moneyfacts, says these products do guarantee that your savings are not eroded by inflation. But she warns that if the certificate is repaid in the first year, then no interest or index linking is paid. If repaid after the first year, but before the end of the term, then a reduced rate is paid.
“Although these products may seem a good deal at the moment, rates at a much higher level can be found elsewhere. Before opting for any savings product, make sure you are getting the best rate of return from one that suits your needs,” Thrussell advises.
Kevin Mountford agrees that, while protecting your savings from the corrosive effects of inflation is a good idea, inflation-linked accounts are “gimmicky”.
“While some of NS&I’s products are good, there are better products out there rate-wise.”