Inflation for November 2023 was at 3.9%. Inflation affects everything, from increasing the price you pay for essentials to devaluing your hard-earned cash savings. But there are ways to beat it, especially if you’re saving or investing for the long term. 

Here’s what you need to know about inflation, why you shouldn’t ignore it and how to make your money work harder when prices are rising.


What is inflation?

Inflation measures whether the price of goods and services is rising over time. When inflation is going up, you’ll find that certain everyday items – like milk, bread or fuel – become increasingly expensive and the cost of living rises.

Causes of inflation

Some of the main causes of inflation include supply and demand, economic policy and rising production costs. For example, if supply is low but demand is high, prices will likely rise. Or if production costs are rising, businesses might increase the price you pay in store.


Why is the inflation rate important?

Inflation has a large impact on the economy and as a result, affects you as a consumer and as a saver. If inflation is rising, the purchasing power of your money will fall. So, the £100 cash that’s sitting in your bank account won’t be able to buy as much this year as it could last year. Essentially, you end up having to pay more to maintain the same standard of living.

If you’re saving for the short term using an interest-paying savings account, rising inflation shouldn’t worry you too much – especially if your interest rate is more than the rate of inflation. But, if you’ve got cash sitting in a current account earning little to no interest, rising inflation rates will have an impact on the value of your savings.


How is inflation measured in the UK?

The benchmark measure of inflation in the UK is the Consumer Price Index (CPI), which is published and updated by the Office for National Statistics (ONS).

To create the CPI, the ONS looks at a number of areas including restaurants, food, hotels, clothing, transport and more, to assess whether the price of regularly bought items has gone up. It does this using roughly 180,000 price quotations for around 700 goods and services, which are analysed every month.

The UK inflation rate for November 2023 was 3.9%, down from 4.6% in October 2023. Here are all of the inflation rates from January 2023 to now:

Month Inflation rate
January 2023 10.1%
February 2023 10.4%
March 2023 10.1%
April 2023 8.7%
May 2023 8.7%
June 2023 7.9%
July 2023 6.8%
August 2023 6.7%
September 2023 6.7%
October 2023 4.6%
November 2023 3.9%

Source: ONS, November 2023


What’s the relationship between inflation and interest rates?

Inflation and interest rates have an inverse relationship – as one rises, the other will tend to fall. In the UK, the government sets an inflation target for the Bank of England, which is then responsible for setting the national interest rate – also known as the ‘base rate’. Banks will often consider the base rate when they determine the interest rates that they offer their customers. 

A higher base rate will usually mean that people spend less and save more, because they can earn decent interest on their money by parking it in a savings accounts. In time, this will bring down the inflation rate as demand for goods and services falls.

On the other hand, when interest rates are low, the economy will tend to grow as people have more incentive to spend their cash instead of saving it. This will usually cause inflation to increase as demand for goods and services rises, which pulls prices up.


How does inflation affect cash savings?

Inflation isn’t great news for your cash savings. Remember, when inflation rises it reduces the purchasing power of your cash. So, if you’re saving for the long term and your money is sitting in a bank account – or even worse, if it’s under your mattress – you can be sure inflation is eating away at it. ️

To make your cash savings grow, the return you’re getting from interest needs to be higher than the rate of inflation. If it’s not, you’re losing money. When you’re comparing the interest you’re earning against the rate of inflation, it’s a good idea to use the real interest rate rather than the nominal interest rate.

  • The nominal interest rate is the underlying interest of your account – like when a bank advertises a savings account with 2.5% interest 
  • The real interest rate is the interest you actually earn once inflation has been factored into the equation – effectively how much you’ve ‘beaten’ inflation by

To get the real interest you’re earning, subtract the inflation rate from the nominal interest. So, if your savings are earning 2.5% interest a year and the inflation rate is 2.0%, the real interest you’ve earned is 0.5%. That said, cash can still be a good place to hold your short-term savings and rainy day fund – just make sure you’re putting your money into the type of savings account that helps make it work harder for you. 

Learn more about the different types of accounts you need to know in our Money-Smart Guide

For your long-term financial goals, this is where investing comes in. Investing can make your money work harder, providing healthy returns over time and beating inflation. Take the graph below, you can see that the historical returns on investments like shares have even beaten the interest rate returns on cash in the long term.

Holding your investments for at least five years is recommended so you can ride out the ups and downs of the stock market and manage your risk. 

For example, if you had invested £1,000 in the Moneybox ‘Balanced’ Starting Option in 2014, it would’ve been worth nearly £2,200 by the end of 2023 – an average annual return of 8.8%. The chart below shows how these investment returns measured up against the returns of cash savings in the same period.

Returns based on our Balanced Starting Option’s average annual return of 8.8% from the end of 2013 to the end of 2023 and includes fees. Historic performance doesn’t guarantee future returns, so it’s important to consider that investing involves risk and you may get back less than you invest.


How does inflation affect investments? 

While investing is a great option for your long-term savings, inflation can still have an impact on your investments. It comes down to the different assets you’ve invested in and how they respond to inflation.

  • Stocks should be assessed by looking at the real return of your investments relative to the rate of inflation – similar to your cash savings. For example, if you earned 5% in gains on your Stocks & Shares ISA, but the inflation rate was sitting at 1%, you’d have actually earned a 4% return in real terms. 
  • Bonds will often fall in value during periods of rising inflation, because higher inflation will decrease the purchasing power of the bond’s future cash flows.
  • Gold is famous as a bet against inflation due to its ‘safe-haven’ status. But, it’s worth noting that historical data shows gold doesn’t always protect against inflation, so it’s important to do your own research and understand the risks before investing.


Ready to make your money work harder for your future? Check out our Stocks & Shares ISA and start investing with just £1.