Savers may have to wait until early 2024 for the interest they receive to finally start beating inflation, based on the latest Bank of England projections.
Savings rates have been well below the rate of CPI inflation for some time now, meaning that the money kept in accounts loses value in real terms.
In fact, for 18 months there hasn’t been one single account that has managed to match or better inflation.
Inflation rose again to 11.1 per cent in the 12 months to October, up from the 10.1 per cent rise recorded in the 12 months to September.
When will savings beat inflation? The future is hard to predict, but the Bank of England forecasts can give some clues about when the balance might shift
Meanwhile, the best easy-access savings deal pays 2.81 per cent, and the top one-year fix pays 4.36 per cent. Even the top five-year fix pays 4.9 per cent interest, some way off the current inflation measure.
>> Check 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, meaning that the gap between savings interest and inflation could start to narrow.
The Bank says that 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 is evidence suggesting that bottlenecks impacting global supply chains are starting to ease.
Its Monetary Policy Committee expects inflation to remain above 10 per cent into the early months of next year before falling back.
It predicts inflation to fall to around 5.2 per cent by the end of next year and then to about 4 per cent between January and March 2024.
Looking even further ahead, it predicts inflation to be down to around 2 per cent in two years’ time and 0.5 per cent in three years’ time, as energy prices reverse and domestic pressures lessen.
Going down: The Bank of England expects inflation to fall back next year before ultimately dropping below its 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, then savers will likely be sighing in relief.
Over the past 18 months, even savers who stashed their money in the best-paying savings accounts will have seen the value of that money gradually eaten away by inflation – though earning some interest is better than earning none at all.
CPI inflation measures rising costs over the past 12 months, so October’s 11.1 per cent inflation figure means that the typical prices of goods and services were 11.1 per cent higher than they were in October last year.
Imbalance: CPI inflation has broadly continued rising since early last year. The last savings rate able to keep up with inflation ended in April 2021
The Bank of England is expecting inflation will fall: It says that some of the production difficulties that businesses 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 at the start of October 2021 paid 1.51 per cent.
A saver who stashed £1,000 in that account a year ago will have earned £15 in interest, but it would have needed to have earned them £110 to match the rate of inflation.
So what does the situation look like for someone putting money in a savings account today?
To find out, someone stashing their cash in the best one-year fix paying 4.36 per cent would need to work out what inflation would be in 12 months time.
The Bank of England is projecting inflation to be around 5.2 per cent this time next year. That means a saver in the best fixed rate deal would still be worse off in real terms.
It means that something that costs £1,000 today would cost £1,052 in 12 months’ time.
However, putting that same £1,000 in the best one-year fixed savings account would only have increased your savings to £1,043.
However, based on the Bank of England’s projections, putting money into a two-year savings rate today might just about do enough to beat inflation.
A saver with their cash in the best two-year fix paying 4.75 per cent will technically be worse off in a year’s time. However, between the final three months of next year and the final three months of 2024, inflation is projected to be at 1.4 per cent.
This means, what £1,000 will have purchased someone today will typically require £1,067 in two years time.
Someone with £1,000 in the best two-year fixed rate saver will earn £97 in interest will therefore end up with £1,097 at the end of the two year period – beating the rate of inflation in the process.
Savvy move? A saver could offset inflation in the future by saving into a fixed-rate deal now
Someone putting their cash in a three-year fixed rate account paying 4.8 per cent will do even better based on the Bank of England’s projections.
The best three year fix currently pays 4.8 per cent with Zopa Bank. The Bank of England is projecting inflation to fall to 0 per cent in the final quarter of 2025.
This means that £1,000 today will effectively have the same purchasing power as £1,067 around three years from now.
Someone putting £1,000 in Zopa’s three-year fix paying 4.8 per cent will end up with £1,151 at the end of the three year period.
How reliable are the projections?
There is one major caveat to all of this, however. The Bank of England’s projections are ultimately just projections. How CPI inflation plays out over the next few years is hard to accurately predict.
After all, the Bank of England has predicted wrong on many occasions in the past.
This time last year, the Bank predicted that inflation would peak at around 5 per cent in April 2022 before falling back – and that has clearly not been the case.
For those looking to beat inflation over the long term, investing will likely prove the more effective remedy – even if there are ups and downs along the way.
Cash has only performed better than shares in four of the last 20 years, according to recent research by Janus Henderson.
Those looking for the most cost-effective way to invest may wish to consider online DIY investing platforms, as most of these include the option to invest in an Isa.
When weighing up which one to go for, it’s important to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.
This is Money has written an extensive guide on the best and cheapest DIY investing platforms, which might help you decide.
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