How does inflation affect my savings?
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In short: Inflation erodes the real value of cash when prices rise faster than your savings interest. £1,000 in an account paying less than inflation buys less each year even if the balance grows on paper.
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Reviewed by Kaiser Khan
Inflation measures how fast everyday prices are rising. When inflation is 3% and your savings account pays 1%, your balance still increases in pounds and pence, but what you can buy with it falls — a gap economists call a negative real return.
Cash ISAs and easy-access accounts are safe in the sense that the nominal balance does not fall, but they may not keep pace with the cost of living over long periods. That matters most for money you will not need for several years, such as a house deposit fund or retirement savings outside a pension.
The Bank of England targets 2% inflation and publishes the Consumer Prices Index (CPI) each month. Comparing your account rate to CPI shows whether your savings are gaining or losing purchasing power. When inflation is high, shopping around for the best savings rate limits the damage, though beating inflation with cash alone is often difficult.
Money you need within the next few years usually belongs in savings despite inflation risk, because capital stability matters more than growth. Longer-term goals may suit investing, where returns can outpace inflation but are not guaranteed and values can fall.
Primary source: gov.uk/savings-linked-to-inflation
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