Inflation drops slightly to 10.1% - how will it affect your savings?
Inflation dipped to 10.1% in March 2023, according to data from the Office for National Statistics (ONS). Economists predicted it would fall below 10%, but rapidly rising food prices have kept it in double figures.
The Consumer Prices Index (CPI) measure of inflation, which tracks the cost of an imaginary 'shopping basket' of around 700 popular goods and services, is down from February 2023, when it jumped to 10.4% after months of decline.
While a fall in petrol and diesel prices helped ease inflation in March, the smaller than expected drop was down to the soaring cost of food.
Here, Which? explains why the inflation rate has risen, and how it compares to the top-rate savings accounts and cash Isas. We also share tips for tackling the rising cost of living.
Why has inflation eased?
Falling petrol and diesel prices were the main drivers of March's decline in inflation. Overall, motor fuel prices dropped by 5.9% in the year to March 2023, compared with a rise of 4.6% in February. Petrol prices fell by 1.2p per litre between February and March 2023, compared with a rise of 12.6p per litre between the same two months a year ago, following Russia's invasion of Ukraine in February 2022. Similarly, diesel prices fell by 3p per litre this year, compared with a rise of 18.8p per litre a year ago.
A 6.7% drop in the cost of heating oil between February and March this year also helped bring inflation down. Falling prices of furniture and household goods, clothing and footwear, and restaurants and hotels also contributed.
However, this was offset by the spiralling cost of food and non-alcoholic beverages, which increased by 19.1%. Prices for these items rose at their fastest rate since 1977.
Which?'s own supermarket food and drink inflation tracker found the price of staple foods such as cheddar cheese, white bread and pork sausages has soared by up to 80% in some shops over the past year. Porridge oats saw the biggest cost increase, according to our analysis, with prices up by an average of 35.5%. That was followed by skimmed milk, which was up by 33.6%, and cheddar cheese, which rose by 28.3%.
The graph below shows how inflation has changed since January 2019:
The Bank of England’s target is to keep inflation as close to 2% as it can, but it hasn’t been that low since July 2021. Before that, inflation was very low – below 2% from August 2019 to April 2021, falling to a low of 0.2% in August 2020 due to the pandemic’s impact.
Even when there is a decrease in the inflation figure, it doesn't mean prices will fall as well – it merely shows they are rising at a slightly slower rate.
Student loan interest capped at 6.9% from March
March's RPI figure (13.8%) is usually used to increase the interest rate for student loan repayments. Following the usual method of using RPI plus 3%, it means student loan interest would hit 16.8% in September.
However, the government has introduced a series of caps on interest rates to protect students from rising inflation.
That was set at 6.3% from 1 September 2022 to 30 November 2022, rising to 6.5% between 1 December 2022 and 28 February 2023. In March 2023, the cap went up to 6.9%. That will change again from 1 June 2023 to 31 August 2023, when the maximum interest paid on loans will be 7.3%.
- Find out more: repaying your student loan
Can any savings rates beat CPI inflation?
This table shows the top rates for fixed-term and instant-access cash Isas and savings accounts, ordered by term.
| Account type | Account | AER/EPR | Terms |
|---|---|---|---|
| Five-year fixed-term savings account | Tandem Bank 5-Year Fixed Saver | 4.6% | £1 minimum deposit |
| Five-year fixed-term cash Isa | Gatehouse Bank* 5-Year Fixed Term Woodland Cash ISA | 4.2% | £1,000 minimum deposit |
| Four-year fixed-term savings account | United Trust Bank UTB 4-Year Bond | 4.56% | £5,000 minimum deposit |
| Four-year fixed-term cash Isa | Gatehouse Bank* 4-Year Fixed Term Woodland Cash ISA | 4.2% | £1,000 minimum deposit |
| Three-year fixed-term savings account | Al Rayan Bank* 36-Month Fixed Term Deposit | 4.68% | £5,000 minimum deposit |
| Three-year fixed-term cash Isa | Cynergy Bank Fixed Rate Cash ISA | 4.2% | £500 minimum deposit |
| Two-year fixed-term savings account | Al Rayan Bank* 24-Month Fixed Term Deposit | 4.62% | £5,000 minimum deposit |
Source: Moneyfacts. Correct as of 18 April 2023, but rates are subject to change. *The accounts from Gatehouse Bank and Al Rayan Bank are Shariah-compliant products and so pay an 'expected profit rate' (EPR) as opposed to an 'annual equivalent rate' (AER).
As you can see, none of the top-rate savings accounts are currently able to keep up with inflation.
However, saving rates for all types of products are continuing to soar, with a three-year account offering the top rate of 4.68% EPR and the top five-year deal offering a rate of 4.6% AER. With little difference in the rates offered by the various types of fixed bonds, it may be tempting to opt for a shorter-term account. But investing in a longer-term product will mean your savings will be protected from any fall in interest rates over that period.
Also, a word of warning to anyone waiting for rates to rise even higher before opening a savings account: many of the top-rate products are offered by challenger banks which often pull their deals once the quota for deposits is hit. The shelf-life for some accounts is as little as a few days, so you'll need to act fast to grab these market-leading rates.
- Find out more: how to find the best savings account
How does CPI inflation affect your savings?
CPI inflation is the speed at which the prices of the goods and services bought by households rise or fall. It tracks the costs of a shopping basket of around 700 popular goods and services bought by households – from tinned tomatoes to train journeys.
The figure – which is provided by the ONS each month — shows how much prices have changed compared with the same month of the previous year. For example, if you'd bought all the same items in the basket in March 2022 and bought them all again the same month in 2023, you could expect your shop this year to be 10.1% more expensive.
When you keep money in your bank, you'll likely be earning interest, which should balance out the effects of inflation. If your cash isn't growing in interest at the same rate of inflation or more, it will effectively lose value because you'll be able to buy less with it. That's why you should ensure that your money is making the best return possible – even when savings rates are low.
- Find out more: how to find the best cash Isa
How to cut costs when prices are still high
The soaring price of food and non-alcoholic drinks is continuing to put pressure on households, but there are ways you can cut your grocery bills.
A good place to start is to get picky about where you shop. Our monthly comparison of how much the UK's biggest supermarkets charge for a trolley of groceries, including everything from bread to toothpaste, can help you make the right choice. We found that Aldi was the cheapest overall in March 2023, followed closely by Lidl and Sainsbury's in third place. The most expensive was Waitrose. Take a look to see how your favourite store compares.
We also have a guide on how to spend less at the supermarket, which is packed full of handy advice, from avoiding convenience stores to switching ranges. You might also want to consider getting a loyalty card from your favourite supermarket to unlock big discounts and other exclusive rewards.
Our Affordable Food For All campaign is calling on the big supermarkets to take action and make a real difference to communities across the UK – sign the petition to encourage your supermarket to take action.
Get further help with the cost of living
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