What's the latest on inflation?
The Consumer Price Index measure of inflation stood at 4.4 per cent in July, according to the most recent figures from the Office for National Statistics. This is a rise from 4.2 per cent in June and far exceeds the Government's 2 per cent target. In a bid to tame inflation, the Bank of England is expected to keep interest rates on hold at 0.5 per cent for up to another two years.
So what does this mean for savers?
High inflation coupled with rock-bottom interest rates means a double blow for the nation's savers. Not only is your cash earning paltry rates of interest, it is becoming worth less and less in real terms. To beat inflation, basic rate taxpayers now need an account paying at least 5.5 per cent.
Which savings accounts provide the best returns?
Average interest rates on easy access accounts currently stand at just 0.77 per cent, according to Moneysupermarket.com, so savers will need to look elsewhere for returns. Your first port of call should be a cash ISA in which you can save up to £5,340 this tax year without having to pay tax on the interest earned.
What about inflation linked accounts?
Index-linked savings accounts track inflation, therefore guaranteeing your cash will not lose its purchasing power. For example, NS&I's Index-Linked Savings Certificates pay the rate of RPI inflation every year plus an average 0.5 percentage points in fixed-interest over their five-year term.
Should I consider stocks and shares to keep pace with inflation?
Historically, the stock markets have out-performed cash or government bonds. So you may be tempted to put some or all of your £10,680 tax-free allowance into a stocks and shares ISA. But this is not a move for the faint-hearted.