Are your savings losing value? Why inflation could be costing you money

Key Takeaways

• Inflation gap: With inflation at 3.4% and average savings rates at 3.44%, many savers could be losing the purchasing power of their money.
• Real value: If your interest rate is lower than the inflation rate, the "real-world" value of your cash diminishes over time.
• Bank lag: High street banks often do not pass the full Bank of England base rate increases on to their customers.
• Strategic switching: Utilising Fixed Rate ISAs, Cash Lifetime ISAs, or high-yield accounts with bonuses can help your returns outpace inflation.

How inflation erodes savings

Inflation measures the rate at which prices for goods and services increase over time. While it’s a natural part of any economy, high inflation erodes the purchasing power of your money. For savers, this means that unless your savings grow at a rate equal to or greater than inflation, you are effectively losing money.

The latest data shows that the average savings rate in the UK is 3.44%, which falls short of the current inflation rate. This gap means that even as your savings grow, their real-world value diminishes. Unless, of course, your savings are in an inflation-beating savings account like one of these.

Why savings rates lag behind inflation

Savings rates are influenced by the Bank of England’s base rate, which determines how much banks charge each other to borrow money. While high inflation often leads to higher base rates, banks don’t always pass these increases on to savers. As a result, many well-known, high street banks offer rates that fail to keep up with inflation.

If you're trying to save money, this puts you in a tricky position. Many people save to build emergency funds or achieve long-term goals like buying a home or retiring. However, if real returns on savings remain negative, these goals become harder to achieve. According to Moneyfacts, less than half of savings accounts currently offer rates that beat inflation.

What savers can do

1. Shop around for better rates: Some accounts, like our market-leading Fixed Rate ISA, Cash Lifetime ISA and competitive Easy Access Cash ISA, offer rates that outpace inflation. For example, our HomeSaver account offers 5.24% AER, combining a base rate of 3.74% with a 1.5% bonus for those who use our award-winning mortgage service.
2. Consider fixed-rate options: With a fixed-rate account, you commit your money for a set period in exchange for a guaranteed interest rate. Currently, Tembo’s Fixed Rate Cash ISA offers 4.14% AER (fixed).
3. Leverage free government incentives: Products like the Cash Lifetime ISA not only offer competitive interest rates (3.8% AER variable) but also include a 25% government bonus of up to £1,000 per tax year, making them an attractive option for first-time homebuyers.
4. Keep in mind that the best savings rates can change, so it's worth reviewing your options regularly to make sure your money is working as hard as it can for you. If your current savings account isn’t keeping up with inflation, it’s time to switch.