Inflation falls to 6.8% in July 2023 - can any savings rate beat it?
Inflation fell sharply again to 6.8% in July 2023, according to data from the Office for National Statistics (ONS). It's the second month in a row that inflation has dropped and it's now at a 15-month low, but the price of food remains very high.
The Consumer Prices Index (CPI) measure of inflation, which tracks the cost of an imaginary 'shopping basket' of around 700 popular goods and services, has dropped by 1.1 percentage points from June 2023, when it sat at 7.9%.
Here, Which? explains why the inflation rate has dropped, and how it compares to the top-rate savings accounts and cash Isas. We also share tips for tackling the rising cost of living.
Why has inflation fallen?
This month's inflation figure marks the smallest increase in living costs since February 2022. The drop in inflation was mainly driven by falling gas and electricity prices as a result of the energy price cap reduction last July.
Food price inflation has also eased again, particularly for milk, bread and cereal, but supermarket prices remain very high and are expected to stay that way for the rest of the year, according to the Bank of England (BOE). There is speculation from the BOE's chief economist that prices will never return to pre-pandemic levels.
Some food is continuing to see huge price increases - Which? analysis this week found the costs of some branded foods have soared by up to 130%.
The price of hotels and air travel are continuing to increase, keeping overall inflation high, and any optimism that the rate of inflation will continue its downward trend may be premature. A report by the Independent claims the Treasury is braced for inflation to rise again next month. That could spell further bad news for mortgage holders if it leads the Bank of England to hike the base rate again when it meets on 21 September.
The graph below 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 figure of 0.2% in August 2020 due to the impact of the pandemic.
Rail fare rises to stay below RPI inflation
July's Retail Prices Index (RPI) measure of inflation - which tracks the same basket of goods, but also includes council tax, mortgages and interest payments - hit 9%.
RPI inflation is usually used to determine rail fare price rises for the following calendar year, however the government has confirmed the 2023 rail fare rises will be below this rate and any increase will be delayed until March 2024.
Can any savings rates beat CPI inflation?
The closer your savings rate is to the rate of inflation, the less value your cash will lose over time. That's why you should ensure that your money is getting the best interest rate possible – even when savings account rates are comparatively low.
This table shows the top rates for fixed-term and instant-access cash Isas and savings accounts, ordered by term.
| Account type | Account | AER | Terms |
|---|---|---|---|
| Five-year fixed-term savings account | Cynergy Bank Fixed-Rate Bond | 5.81% | £1,000 minimum deposit |
| Five-year fixed-term cash Isa | Shawbrook Bank 5-Year Fixed-Rate Cash Isa Bond | 5.22% | £1,000 minimum deposit |
| Four-year fixed-term savings account | Hampshire Trust Bank 4-Year Bond | 5.85% | £1 minimum deposit |
| Four-year fixed-term cash Isa | ZopaSmart Isa - 4-Year Fixed-Term Isa pot | 5.26% | £1 minimum deposit |
| Three-year fixed-term savings account | Recognise Bank 3-Year Fixed-Rate Account | 6.05% | £1,000 minimum deposit |
| Three-year fixed-term cash Isa | Aldermore 3-Year Fixed-Rate Cash Isa | 5.51% | £1,000 minimum deposit |
| Two-year fixed-term savings account | Recognise Bank 2-Year Fixed-Rate Account | 6.1% | £1,000 minimum deposit |
Source: Moneyfacts. Correct as of 15 August 2023; rates subject to change.
No rate can beat or even match today's inflation figure, but with interest on some products currently soaring above 6% AER - a 15-year high - it's a great time to open a savings account.
Challenger banks continue to dominate the market, with short-term accounts offering the best rates. Unsurprisingly, demand for these types of product has surged.
One-year accounts proving popular
When it comes to fixed-rate savings accounts, one-year products are most popular, with 58% of those who opened new accounts in May having opted for this term according to analysis of CACI data by Paragon Bank.
Four in 10 (38%) opted for an 18-month or two-year account. Only 4% chose terms beyond two years, with 0.4% selecting a five-year deal.
During the same month last year, 16% of fixed-rate accounts opened were for a term longer than two years, showing how much the market has changed over the last 12 months.
- Find out more: how to find the best savings account and how to find the best cash Isa
How to cut costs when prices are still high
The rising price of hotels and air travel will be a worry for those planning to book a last-minute summer holiday, but there are also lots of ways to save on flights - from being flexible with dates and times to avoiding airline extras. You can also slash hundreds of pounds off your accommodation bill by using simple hacks to find cheap hotels, including shopping around and calling the hotel directly to book.
As rail fares are also set to increase next year, we put together some expert tips on how to find train ticket deals.
Food prices remain very high and we have lots of advice to help you cut costs on your grocery shopping, plus our monthly results revealing which is the cheapest supermarket.
You can also get expert Which? advice, news and podcasts on cutting costs with our cost of living content hub.
