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When prices rise faster than your income, you start to feel the pinch. Your money doesn’t go as far as it used to, but you still need to buy essentials like food and fuel, and pay your bills. Find out how rising inflation can also affect the value of your cash savings over the longer term and get some tips that might help.
What is inflation?
Inflation shows how quickly prices are rising for goods (like a loaf of bread or a litre of petrol) and services (like getting a haircut). It’s why most things cost more now than they did in the past.
For example, the average sliced white loaf cost 39p in 1985; in 2025, it’s £1.40. That’s more than three times as much – up by 259%!
How is inflation measured?
The Office for National Statistics (ONS) measures inflation in a range of ways, but the Consumer Prices Index (CPI) is the one that’s most commonly used.
The CPI tracks the cost of everyday items by using average prices for a wide range of goods and services in a virtual ‘shopping basket’. This covers more than 700 goods and services in total. The ONS updates the contents of this basket regularly, so it reflects changing habits.
Each month, the ONS compares the cost of the shopping basket with the same month the previous year. This gives inflation as a percentage. So, for example, if the basket costs 5% more than last year, the rate of inflation would be 5%.
How inflation can reduce the value of savings
Inflation means your money doesn’t stretch as far – whether it’s your income or your savings.
When the interest on your savings is lower than the rate of inflation, this reduces the value of your savings in what’s known as ‘real’ terms.
Example: how inflation cuts the ‘real’ value of savings
Let’s use our £1.40 sliced white loaf as an example.
- Your savings account has £140 in it – enough for 100 loaves of bread at today’s prices.
- You get 1% interest a year on those savings. So, after a year, you have £141.40 – enough for 101 loaves of bread at today’s prices.
- But imagine the price of bread went up by 5% over that same year. Each loaf now costs £1.47 – the price has gone up faster than the interest rate on your savings (1%).
- So, even with £141.40, your savings only buy 96 loaves.
| Money in savings account today | Price of loaf today | Loaves bought with savings today |
| £140 | £1.40 | 100 |
| Money in savings account in one year (1% interest) | Price of loaf in one year (5% increase) | Loaves bought with savings in one year |
| £141.40 | £1.47 | 96 |
This example shows how inflation can reduce your savings’ buying power over time.
The link between inflation, interest rates and savings
The Government’s yearly inflation target is 2% as measured by CPI. When prices rise faster than this – especially if they rise faster than incomes – people start to experience pressure relating to the cost of living. The same thing happens to money in a savings account if prices rise at a higher rate than the interest you’re getting.
It’s the Bank of England’s job to meet the Government’s inflation target. Its main tool for this is changing its interest rate, which is known as the base rate.
Most savings accounts providers and lenders (like banks and building societies) adjust their interest rates for savings and loans when the Bank of England raises or lowers the base rate.
What the Bank of England does to manage inflation
If inflation is high, the Bank of England might raise the base rate. This makes borrowing more expensive and saving more rewarding – which can mean people and businesses reduce their spending, lowering demand and prices.
If the economy is struggling and inflation is low, the Bank of England might lower the base rate. This makes borrowing money cheaper and saving less attractive. The aim is to encourage people to spend money, boosting the economy.
Can you protect your savings from inflation?
When inflation is high, you have some options that could reduce the impact of inflation on your savings.
Review your savings: get the best interest rate
Compare interest rates
Price comparison sites are an easy way to compare accounts, but look out for any restrictions. Restrictions might include:
- only being able to take out money once a year
- time limits, such as an interest rate lasting for the first six or 12 months.
Look out for ‘variable’ interest rates
Many easy-access savings accounts are variable interest rate accounts. That means that the interest rate can change and it often does if the Bank of England raises or lowers the base rate. Check the rate your savings are currently earning – it may be lower than when you opened the account.
Consider fixed-rate savings accounts
If you won’t need your money quickly, fixed-rate savings lock your savings away for a set time (one, two or five years, for example). You can’t touch your money for that period (unless it’s in a fixed rate individual savings account or ISA) but you may get a higher interest rate than accounts offering instant access.
This interest rate may become variable after your fixed period ends, so check it at that point.
Use tax-efficient savings
With cash ISAs, you don’t pay tax on the interest you earn. There’s also no tax to pay when you take money out.
This can help give your savings a boost, potentially helping them better keep up with inflation.
Consider investing for the long term
The longer your money is in cash savings accounts, the longer inflation has to potentially erode their value. So, for longer-term goals (at least five years away), investing may be a better option as there’s the potential for better returns than interest on cash.
It’s important to remember that the value of investments can go down as well as up, so you may get back less than you pay in.
However, when you invest for the long term, the hope is that growth in your investments outweighs any losses.
Not sure if investing might suit you more than saving in cash? Find a financial adviser for support.
Should you keep any savings in cash?
Cash savings offer a quick source of money in an emergency, whether that’s because your car breaks down, the boiler packs up or you lose your job.
The UK government-backed independent MoneyHelper service suggests having an emergency fund to cover three to six months of outgoings. For more on this, read our guide to emergency funds.
But holding more savings in cash than what you might need in an emergency could see you lose money in ‘real’ terms. It’s here that investing could put your money to work and offer an opportunity to keep up with – or grow faster than – inflation.
