Inflation, as measured by the Consumer Prices Index (CPI), increased from 3.4% to 3.5% in March, driven higher by food and clothing prices. It is the first time inflation has risen in the last six months.
According to retirement income specialists MGM Advantage, the latest rise means that collectively UK households will need to find an extra £32billion, equivalent to £509 per person, to maintain the same standard of living they enjoyed 12 months ago.
Inflation had been expected to continue falling back towards the government's 2.00% target this year. However, rising fuel and food costs have reversed the trend and the deputy governor of the Bank of England has warned that inflation could remain above 3.00% for the rest of the year. That means savers must do all they can to avoid the purchasing power of the cash being eroded.
Kevin Mountford, head of banking at MoneySupermarket, said: "The rise in inflation once again impacts UK households who have been struggling to cope with rising costs, and this increase is disappointing given inflation has been falling since late last year. High inflation combined with low interest rates has been a real problem for UK savers, especially those who rely on savings for a regular income."
Here, we take a look at some of the savings accounts which can help savers hit back against inflation...
Use your ISA allowance
To beat inflation, basic rate tax payers now need an account paying at least 4.38% to gain benefit in real terms from their savings, according to our calculations at MoneySupermarket. This increases to 5.83% for higher rate tax payers and 7.00% for 50% tax payers. Only a handful of fixed rate cash ISAs and fixed rate bonds beat the rate for basic rate taxpayers, while no accounts beat the rate if you pay a higher rate of taxation.
You can invest up to £5,640 in a cash ISA this tax year, and the good news is there are plenty of great deals currently on offer.
BM Savings two-year Fixed Rate ISA, for example, pays a generous 4.05% annual interest tax-free on a minimum investment of £500
If you require instant access to your cash, then the AA is paying 3.50% on a minimum investment of £2,500 held in its Internet Access ISA Issue 3. This rate includes a bonus of 3.00% which is payable for the first 12 months and the account does not accept transfers from existing ISAs.
For those who are prepared to lock up their money for three years, Halifax's ISA Saver Fixed account pays 4.25% on a minimum investment of £500. Halifax also pays the top rate on its five-year ISA Saver Fixed account, at 4.50%, and again this account can be opened with a minimum investment of £500.
If you require instant access to your cash, then Cheshire Building Society is paying 3.50% on a minimum investment of £1,000 held in its Direct Cash ISA Issue 2. This rate includes a bonus of 2.5% which is payable until the end of October next year and the account does not accept transfers from existing ISAs.
TOP TIP! If you do choose an ISA which includes a substantial bonus in the rate for the first few months, don't forget to make a note of when the bonus disappears and switch your money then.
Fixed rate savings
If you've already used your cash ISA allowance, then fixed rate savings accounts offer one of the few other ways to beat or keep pace with inflation.
The market leading one-year fixed rate bond currently available is from Cahoot, paying an impressive 3.65% annual interest before tax on a steep minimum investment of £25,000.
If you don't have that much to invest, then BM Savings and Allied Irish Bank pay 3.50% and 3.40% respectively on a minimum investment of £1 and £1,000.
For savers who can afford to fix for longer, BM Savings pays a market-leading 3.90% annual interest before tax on a minimum investment of just £1, while Halifax pays 4.00% annual interest before tax on its 3-Year Fixed Online Saver account, which can be opened with a minimum investment of £500.
Top five-year fixed rate bonds include Vanquis Bank's 5-Year Fixed Rate bond which pays 4.51% on a minimum investment of £1,000 and Halifax's 5-Year Fixed Online Saver account which can be opened with £500.
TOP TIP! Remember that if you are considering a longer term fixed rate bond, that while interest rates look tempting now, they may not be quite so appealing in a few years' time if interest rates have risen, so think carefully about how long you tie yourself in for.
Inflation-linked accounts
The most obvious way to beat inflation may seem to be an index-linked account, but you could end up getting back less than you expect.
When inflation is high, then these accounts offer an excellent way to ensure your savings will maintain their purchasing power. But if inflation falls over the next few years, as is widely expected, most of these bonds will only give you back what you invested at the outset, plus a lower fixed rate of return than you might have achieved elsewhere.
TOP TIP! Whichever account you choose, remember to regularly review your savings to ensure your money is working as hard as possible for you.
Kevin Mounford said: "Despite inflation falling over the last six months, it is clear that the pressures on inflation are not easing and it may be some time before it moves towards The Bank of England's own inflation target of 2.00%. Now is the time for households to use the opportunity to review all their finances and find ways to maximise their income."
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.
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