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Inflation drops to lowest level since 2021: how do savings rates compare?
The number of inflation-beating savings deals has jumped, thanks to a sudden drop in the CPI figure
Inflation as measured by the Consumer Price Index (CPI) plunged to 1.7% in September. This is the first time it has dropped below the Bank of England's 2% target since April 2021.
Lower airfares and petrol prices were the main drivers behind the fall, data from the Office for National Statistics (ONS) shows.
The sudden drop in the CPI figure means there are now even more inflation-busting savings accounts to choose from. Read on to find out which accounts offer the best returns on your money.
The best inflation-beating savings accounts
While savings rates are now steadily falling, the sudden drop in the CPI figure means there are even more inflation-busting deals than a month ago.
Our analysis of Moneyfacts data shows that 1,997 savings accounts (97% of all products) offer rates higher than September's inflation figure of 1.7%. That includes instant access, variable-rate deals, fixed-rate bonds and Isas. Last month, 1,876 accounts (94%) beat inflation.
The number of fixed-rate accounts with rates above inflation remains the same at 99%, but the percentage of variable-rate accounts offering interest above 1.7% jumped from 89% last month to 95% today.
If we go back a year to October 2023, when the September CPI measure stood at 6.7%, there were no deals that could beat inflation.
This table shows the top rates currently available on fixed-term and instant-access cash Isas and savings accounts, ordered by term.
| One-year fixed rate | Union Bank of India (UK) Ltd | 5% | n/a | £5,000 | Internet | On maturity |
| One-year fixed rate Isa | Aldermore | 4.56% | 61% | £1,000 | Internet | Monthly, on maturity |
| Two-year fixed rate | Atom Bank | 4.6% | 65% | £50 | Mobile app | Monthly, yearly |
| Two-year fixed rate Isa | Hodge Bank | 4.41% | n/a | £1,000 | Internet | Anniversary, monthly |
| Three-year fixed rate | Principality Building Society | 4.6% | n/a | £500 | Branch, internet, postal | Monthly, yearly |
| Three-year fixed rate Isa | UBL UK | 4.31% | n/a | £2,000 | Branch, internet, mobile app, postal | Anniversary, monthly, on maturity, quarterly |
| Four-year fixed rate | Hampshire Trust Bank | 4.27% | n/a | £1 | Internet | Yearly |
Table notes: rates sourced from Moneyfacts on 16 October 2024. Provider customer score is based on savers' overall satisfaction with the brand and how likely they are to recommend it to others. n/a means sample size was too small for us to generate a provider score (a) 5% interest on balances up to £3,000
- Find out more: the different types of savings accounts
How savings track against inflation
It's important to choose an account with a rate higher than the current CPI figure, because if the interest rate on your account is below inflation, your savings will effectively lose value over time.
This table shows how average savings rates compare to inflation since August 2020, according to data from Moneyfacts:
As you can see, average rates on one-year and longer-term bonds have beaten inflation since October 2023, with average instant-access rates not rising above the CPI until April 2024.
What's happening to savings rates?
Savings rates on both fixed and variable accounts have tumbled since the Bank of England cut the base rate from 5.25% to 5% in August. A drop in the base rate is usually bad news for savers, as banks often respond by reducing the interest paid on savings accounts.
Average interest on variable-rate accounts, which are usually the first to be cut when the base rate falls, dropped from 3.14% AER on 1 August to 3.07% on 1 September. The good news for anyone with this type of account is that rates now appear to be holding steady, with the average rate on 1 October remaining the same as last month.
Rates on fixed bonds, however, are continuing to slip. Moneyfacts data shows the average one-year account dropped from 4.63% AER on 1 August to 4.31% at the beginning of this month. There's a similar downward trend for long-term fixes (lasting more than a year), with interest slipping from 4.13% AER to just 3.93% over the same time period.
While it's still possible to get 5% interest on variable-rate accounts, it's unlikely these will be around for much longer. This month's fall in inflation could persuade the Bank of England to cut the base rate further, pushing savings rates down with it.
- Find out more: best savings accounts 2024
How much will the state pension rise by?
The state pension is protected by the ‘triple lock'. This protection dates back to 2010 and guarantees pensions will increase each year by either September’s inflation, earnings growth (from the period between May to July) or 2.5% – whichever is highest.
As this month's CPI figure is significantly lower than current wage growth, the state pension is expected to rise by 4.1% from April 2025.
- Find out more: state pension advice
Why did inflation sink to 1.7%?
A dramatic drop in the cost of air fares was one of the main drivers behind this month's fall in inflation.
The monthly price of domestic, European and long-haul flights fell by 35% in September. A reduction in air fares isn't unusual between August and September, but the ONS says this was the fifth-largest fall since 2001.
It's a very different story to last month's inflation data, which showed the cost of flying jumped by 22% between July and August 2024.
The cost of motor fuels also helped push inflation down, but households were hit by food and drink price rises, with costs jumping for milk, cheese, eggs, soft drinks and fruit.
It's important to remember that while this month's CPI figure is now lower than Bank of England's target of 2%, it doesn't mean prices are going down; it just means they're rising at a slower rate than before.
