Inflation rate rose to 4% in December 2023 - can any savings accounts beat it?

Inflation, as measured by the Consumer Prices Index (CPI), unexpectedly jumped to 4% in the 12 months to December 2023, according to data from the Office for National Statistics (ONS). 

It's the first time the rate has increased since February 2023 and follows two consecutive months of falls. Economists had predicted inflation would see a small drop from last month's figure of 3.9% to 3.8%. 

Although only a slight rise, households could be in for a shock as broadband and mobile providers will use December's CPI inflation figure to calculate April price hikes, and savers will need to review if their nest eggs are keeping up with rising prices.

Here, Which? explains why the inflation rate has gone up, and how it compares to the top-rate savings accounts and cash Isas. We also share tips for checking broadband price rises and tackling the rising cost of living.

Why has inflation risen?

The rise in the annual rate of inflation was driven largely by tobacco and alcohol price rises. In the year to December 2023, the cost of these increased by 12.8% - up from 10.2% the month before.

The ONS blames the uptick on the government's increase to tobacco duty, which came into force on the evening of the Autumn Statement on 22 November 2023. The price of tobacco alone rose by 4.1% between November and December, leading to an annual increase of 16%.

Alcohol duty is frozen until August 2024, but the price of booze still rose by 9.6% in the year to December. The cost of a drink did fall by 1.6% between November and December 2023.

Inflation on food and soft drinks, on the other hand, continued to drop. The rate eased for the ninth consecutive month to 8% in December 2023 - the lowest it has been since April 2022 and down from a 45-year high of 19.2% in March 2023.  

The graph shows how inflation has changed since August 2020:

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 – hitting a rock-bottom 0.2% in August 2020 due to the impact of the pandemic.

Broadband price rises

Millions of broadband customers are bracing themselves for another round of mid-contract price increases. Providers will use this month's CPI inflation figure to determine how much they will charge in April 2024.

After customers saw the cost of broadband increase by more than 14% last year, Which? has written an open letter to big broadband and mobile providers - BT, EE, O2, PlusNet, Shell Energy Broadband, TalkTalk, Tesco Mobile, Three, Virgin Media and Vodafone - urging them to cancel any unfair and unpredictable spring price hikes.

BT has since announced that it will introduce clearer pricing plans for the summer, but will still go ahead with April’s inflation-linked rises.

Which? advises customers who are not under contract when prices go up to consider switching provider. You can find out how to save money by moving to a better deal using our guide on switching broadband provider.

• Use the Which? broadband and mobile price rise calculator to find out how your bills might change.

Can any savings rates beat CPI inflation?

While savings rates have increased sharply over the past couple of years, they have struggled to keep up with inflation which hit a high of 11.1% in October 2022. The pace at which prices have risen since 2021 has meant nest eggs have been slowly losing value over time. 

The recent falls in the CPI figure have meant savers could finally find inflation-busting deals. But with rates on many types of savings accounts continuing to drop and inflation up again in December 2023, is that still the case today? We took a look at the latest Moneyfacts data to find out.

This table shows the top rates for fixed-term and instant-access cash Isas and savings accounts, ordered by term.

All the top savings accounts can currently beat this December's inflation figure - despite the slight rise. Yet again, challenger banks and Islamic banks continue to dominate the market, with shorter-term fixed-rate products still offering the best returns. 

Which? used Moneyfacts data to look at all accounts with a minimum investment of up to £5,000 and found that 871 offer rates higher than the current rate of inflation of 4%. That's an impressive 60% of the market, when accounts with opening restrictions are included. It also includes children's Isas and savings accounts. 

That might not be the case for long, however. Moneyfacts data shows savings rates are dropping fast. The average rate for a one-year fix has fallen from a 15-year high of 5.42% AER in October 2023 to 4.87% at the beginning of January 2024. Average rates on no-notice easy access accounts also began falling after November 2023, dipping from 3.18% AER to 3.15% this month. 

James Hyde, Moneyfacts spokesperson, says: 'Despite many providers across the sector significantly cutting rates in recent weeks, challenger banks have continued to occupy the top positions in the charts. 

'These providers are often able to offer very competitive deals, however, their readiness to pull top rates once targets have been hit means it’s imperative to strike while the iron is hot to secure the best deal.'

• Find out more: best savings accounts 2024

How to cut costs when prices are still high

An increase in the cost of alcohol and tobacco is likely to put a strain on many consumers still feeling the squeeze. And while inflation on food may be easing, it doesn't mean prices are falling; it just means they're rising slower than before.

We have lots of advice to help you cut costs on your grocery shopping, plus our monthly analysis reveals which is the cheapest supermarket for a big and small trolley of groceries.

• Find out more: get expert Which? advice, news and podcasts on cutting costs on our cost of living help page