How does inflation affect your savings?

In August 2026, UK inflation stood at 3.1%, according to the latest figures from the Office for National Statistics (ONS), which is above the Bank of England’s 2% target.

However, this rate represents a significant decline compared to when it peaked at 11.1% in October 2022 – the highest rate of inflation seen since October 1981, according to the Office of National Statistics (ONS) .

Over the past few years, inflation has been high for several reasons.

Russia’s war in Ukraine and a post-pandemic surge in energy demand caused global financial disruption that drove up prices of energy and other goods.

More recently, energy prices have again been volatile, while transport, particularly motor fuels, made the largest upward contribution to the rise in inflation in August 2026.

Although inflation remains well below its 2022 peak, it rose from 2.9% in July to 3.1% in August 2026.

The Bank of England’s latest Monetary Policy Report says inflation is expected to rise later in 2026 as higher energy prices feed through to consumers, before returning to its 2% target in 2027.

So, what does all this mean and how does it affect your savings?

What is inflation? 

Inflation is a general rise in the price of goods and services in a country’s economy. The rate at which it increases over a given period is called the inflation rate.

The UK government sets the Bank of England an inflation target of 2%, measured by the Consumer Prices Index (CPI).

Low and stable inflation helps households and businesses plan how they spend, save and invest their money. If inflation is too high, however, the value of money falls more quickly and the cost of living rises.

The logic here is that a manageable level of inflation will encourage consumers to buy services and goods sooner to keep the economy ticking along.

How does inflation change over time?  

Although the Bank of England tries to keep the rate of inflation at 2% the actual inflation rate can be higher or lower depending on what is happening in the economy.

Inflation can rise for many reasons. Strong demand for goods and services can push up prices, while increases in businesses’ costs – such as energy, wages or raw materials – can also feed through to consumers.

During the COVID-19 pandemic, for example, consumer spending changed dramatically, with physical shopping ruled out for lengthy periods and hospitality at a standstill.

As economies reopened, supply chain bottlenecks and increased demand for goods contributed to rising prices. This was followed by sharp increases in global energy and food prices after Russia’s invasion of Ukraine, helping to push UK inflation to 11.1% in October 2022.

Inflation has fallen substantially since then. However, lower inflation does not mean that prices are falling. It means that, overall, prices are rising more slowly than they were when inflation was higher.

What are the impacts of rising inflation? 

Rising inflation doesn’t just impact the price of goods and services;; it can also reduce the value of your earnings if your pay fails to keep pace with rising prices.

When wages rise more slowly than inflation, your pay falls in ‘real terms’, because the money you earn buys less than it did before.

The latest ONS figures on earnings show that regular pay grew by 4.8% in May to July 2026. After adjusting for CPI inflation, real regular pay increased by 1.7%.

That means wages are currently rising faster than prices on average. However, individual circumstances vary and higher prices can still make it harder to put money aside, particularly if essential household costs take up a large proportion of your income.

If your income does not keep pace with inflation, you may have less disposable income available to save or invest.

How does inflation erode your savings?

It’s not just monthly wages that can be worth less in real terms.

Savings can also be eroded by inflation, which affects how much you will be able to afford later.

For example, if you had a savings pot of £10,000, and the rate of inflation increased at a rate of 2.5% each year, you could see purchasing power drop to just £7,812 in 10 years.

And in 25 years, that same £10,000 would buy you the equivalent of £5,394 today.

This assumes your £10,000 earns no interest. If your savings earn interest, what matters is whether the interest rate keeps pace with inflation.

For example, if inflation is 3% but your savings account pays 2%, your balance will still grow, but your money will lose purchasing power in real terms. If your savings rate is higher than inflation, your money can gain purchasing power, although tax may also affect the return you receive outside an ISA.

How can you beat inflation with investments? 

High street banks and other savings accounts sometimes don’t offer interest rates that beat inflation.

When the Bank of England cuts Bank Rate, savings providers may reduce the interest rates they offer. This can make it harder to find a savings account that pays a rate above inflation.

There are, however, things you can do to protect your money in the long term.

One option is investing some of your money. Investments have the potential to produce returns above inflation over the long term, although there is no guarantee and the value of your investments can fall as well as rise.  

What is the impact of inflation on stocks and shares ISAs? 

A stocks and shares ISA allows you to invest in assets such as shares, funds and bonds without paying UK Income Tax or Capital Gains Tax on returns within the ISA.

Over long periods, investing in shares has the potential to produce returns that outpace inflation.

However, stock markets can rise and fall significantly, particularly over shorter periods, so a stocks and shares ISA is generally more suitable for money you can leave invested for several years.

Inflation can also affect investments in different ways.

Higher costs can squeeze company profits, while higher interest rates used to control inflation can affect share prices. Some companies may be better able than others to pass higher costs on to customers.

Investing therefore offers the potential to protect the purchasing power of your money over the long term, but it does not guarantee that you will beat inflation.

Using an ISA to protect your investments

If you are saving for a long-term financial goal, such as retirement, investing through a stocks and shares individual savings account (ISA) can give your money the potential to grow faster than inflation over time. However, investments can fall as well as rise, so returns are not guaranteed.

There are plenty of stocks and shares ISA options available, so you can choose the one that’s right for your goals and how risk-averse you are.

You can save up to £20,000 this tax year in an ISA without paying income tax or capital gains tax on the interest, income or capital gains generated within it.

However, from April 2027, this will fall to £12,000 in a cash ISA for under-65s, with a £20,000 ISA allowance overall (additional money can be saved into a stocks and shares ISA or innovative finance ISA). People aged 65 and over will still be able to put up to £20,000 a year into a cash ISA.

The £20,000 overall ISA allowance is not being reduced, so under-65s will still be able to put the remainder into other types of ISA, including a stocks and shares ISA.

How to regularly invest in stocks

Drip-feeding your money, also known as pound-cost averaging, into the stock market means investing a set amount at regular intervals rather than investing a lump sum at once.

This can reduce the risk of investing all your money just before markets fall, although it does not protect you from investment losses.

When you invest small amounts at regular intervals, you may, at times, invest when the market is high, receiving fewer shares for your money.

At other times, you may invest when it’s low and get more shares for your money.

What are the benefits of investing in smaller sums?

Investing in smaller sums helps to smooth out the ups and downs of the price you pay over time. It can also make investing more manageable, as you can contribute regularly from your income rather than needing a large lump sum.

However, regular investing has drawbacks. If markets rise while you are gradually investing your money, you could miss out on some of the growth you might have received by investing a lump sum earlier.

‘Investing’ is an investment of time as well as money, so being patient for those rewards is key.

In uncertain times, expert financial advice can be essential to protecting your long-term financial goals. Let us help you find a qualified financial adviser today.

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Changes in the Bank of England’s base rate can affect the interest rates UK savers receive. When Bank Rate falls, savings rates may also fall, although individual providers set their own rates.

Inflation, meanwhile, reduces the purchasing power of your money over time. Even when inflation falls, prices do not usually fall with it – they simply rise more slowly.

To protect your savings from inflation, it is worth regularly checking the interest rate you receive and considering whether cash savings, investments or a combination of the two is appropriate for your goals and attitude to risk.

Let Unbiased connect you with an expert financial adviser who can help you determine the best ways to save your money to safeguard your wealth against inflation fluctuations and reach your long-term financial goals.