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Savers may have to wait until early 2024 before the interest they receive finally begins to beat inflation, according to the latest projections from the Bank of England.
The savings rate has been well below CPI inflation for some time now, meaning money in accounts is losing value in real terms.
In fact, for 18 months there has not been a single bill that could match or beat inflation.
Inflation rose again to 11.1 percent in the 12 months to October, compared to the 10.1 percent increase in the 12 months to September.
When will savings beat inflation? The future is difficult to predict, but the Bank of England’s forecasts may provide some clues as to when the balance might shift
Meanwhile, the best easy access savings deal pays 2.81 percent and the best one-year fix pays 4.36 percent. Even the highest five-year fix pays 4.9 percent interest, which is a far cry from today’s inflation benchmark.
>> View the best fixed rate savings deals here
But the Bank of England says it expects inflation to fall sharply from the middle of next year, which could narrow the difference between interest rates on savings and inflation.
The Bank says energy prices are now expected to have less of an impact on inflation over the next six months, some commodity prices have also fallen, while there are indications that bottlenecks affecting global supply chains are beginning to ease.
The Monetary Policy Committee expects inflation to remain above 10 percent in the first months of next year before falling back.
It predicts inflation will fall to about 5.2 percent by the end of next year and then to about 4 percent between January and March 2024.
Looking even further ahead, it predicts inflation will fall to about 2 percent in two years and 0.5 percent in three years as energy prices turn and domestic pressures ease.
Downturn: The Bank of England expects inflation to fall back next year before finally falling below the 2% target – but what does this mean for savers?
What does this mean for savers?
If the Bank of England’s projections turn out to be broadly correct, savers are likely to breathe a sigh of relief.
Over the past 18 months, even savers who have deposited their money in the highest paying savings accounts will see the value of that money gradually eaten away by inflation – although it is better to earn some interest than to earn no interest at all.
CPI inflation measures rising costs over the past 12 months, so October’s inflation rate of 11.1 percent means that typical prices of goods and services were 11.1 percent higher than in October last year.
Imbalance: CPI inflation has generally continued to rise since the beginning of last year. The last savings rate that could keep up with inflation ended in April 2021
The Bank of England expects inflation to fall: it says some of the production problems companies have faced are starting to ease
That means what cost someone £1,000 in October last year will typically cost them £1,110 in October this year.
The best one-year fixed-rate savings deal paid 1.51 percent in early October 2021.
A saver who deposited £1,000 in that account a year ago will have earned £15 in interest, but would need to have earned £110 to match inflation.
So what does the situation look like for someone putting money into a savings account today?
To find out, someone who puts their money into the best one-year fix and pays 4.36 percent would have to work out what inflation would be 12 months from now.
The Bank of England expects inflation to be around 5.2 percent by this time next year. That means a saver in the best deal with a fixed rate would still be worse off in real terms.
It means that something that costs £1,000 today would cost £1,052 in 12 months.
However, if you put that same £1,000 in the best one-year fixed savings account, your savings would only have increased to £1,043.
Today, however, based on the Bank of England’s projections, putting money into a two-year savings rate could be just enough to beat inflation.
A saver with his money in the best two-year fix paying 4.75 percent will technically be worse off in a year. However, between the last three months of next year and the last three months of 2024, inflation is expected to reach 1.4 percent.
This means that what £1,000 bought someone today will typically require £1,067 two years from now.
Someone with £1,000 in the best two-year fixed rate saver will earn £97 in interest and will therefore have £1,097 at the end of the two-year period – beating inflation.
Smart move? A saver can compensate for inflation in the future by saving now for a fixed interest rate
Someone who puts their money in a three-year fixed-rate account and pays 4.8 percent will do even better based on the Bank of England’s projections.
The three-year best fix currently pays 4.8 percent at Zopa Bank. The Bank of England expects inflation to fall to 0 percent in the last quarter of 2025.
This means £1,000 today will effectively have the same purchasing power as £1,067 three years from now.
Someone who puts £1,000 into Zopa’s three-year fix and pays 4.8 per cent will get £1,151 at the end of the three-year period.
How reliable are the projections?
There is one important caveat to all this, however. The Bank of England’s projections are ultimately just projections. It is difficult to accurately predict how CPI inflation will develop in the coming years.
After all, the Bank of England has often made incorrect forecasts in the past.
At this time last year, the bank predicted that inflation would peak at around 5 percent in April 2022 and then fall back – which has clearly not been the case.
For those looking to beat inflation in the long run, investing will probably be the most effective remedy – even if there are ups and downs along the way.
Cash has only outperformed stocks in four of the past 20 years, according to recent research by Janus Henderson.
Those looking for the most cost-effective way to invest should consider online DIY investment platforms, as most of these offer the option of investing in an Isa.
When considering which one to go for, it’s important to look at the service it offers, along with handling fees and transaction fees, plus any other additional fees.
This is Money has written a comprehensive guide to the best and cheapest DIY investment platforms, which can help you decide.
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