Latest figures from the Office of National Statistics reveal that the consumer price index (CPI) fell to 3.1% in July, a drop of 0.1% from June's 3.2%, but still a long way above the government's 2% target.
High inflation automatically erodes the value of your savings as time goes by, reducing your spending power. That means you need a return on your savings, after tax is deducted, that is at least equal to the inflation rate, to ensure that your savings maintain their 'real' value.
Basic rate taxpayers now need an account paying at least 3.88% to gain benefit in real terms from their savings, increasing to 5.17% for higher rate tax payers.
Seek out inflation-beating accounts
If you're going to be in with any chance of beating inflation, you'll need to move your money either to a high interest cash ISA or fixed rate bond, or alternatively to an index-linked savings account.
Kevin Mountford, head of banking at moneysupermarket.com, said; "The majority of savers have money sitting in accounts paying less than the 0.5% Bank of England base rate. The first thing for these people to do is move their money to a higher-paying account.
"National Counties' Building Society, for example, has just launched an Index Linked Cash ISA (Issue 2) which guarantees that your savings will beat inflation - and because it's an ISA you also avoid paying tax on the interest you earn."
How the National Counties account works
The account, which is the only one currently available offering an inflation guarantee, pays 1% interest a year fixed for five years, plus, on maturity, interest equal to the percentage change in the Retail Prices Index (RPI) over the same period.
Based on the current 5% annual RPI inflation, that's a 5.82% annual rate, according to National Counties Building Society.
You can invest your full £5,100 cash Isa allowance this tax year into the 2nd Issue Index Linked Cash ISA, as well as any cash transferred from previous ISAs.
If RPI falls over the five-year term, savers will receive their capital back in full plus 1pc interest a year. You'll need to hurry if you're interested in this account - it will be withdrawn from sale on September 30, or sooner if it is fully subscribed.
Remember that you must be prepared to lock up your money for the next five years, as you cannot make withdrawals. You can, however, close the account at any time, although this means you will only earn the 1% fixed interest, not any RPI-linked interest.
Other savings options
The closest competitor to the National Counties account is a four-year fixed-rate cash ISA from Halifax paying 4.25%, and again you will need to be prepared to lock up your money for this length of time.
The minimum investment is £500 and you can only make one deposit at the time the account is opened. As well as investing this year's cash ISA allowance you can also transfer money invested in previous tax years.
Kevin said: "If you've already used this year's ISA allowance consider a fixed rate bond. Bank of Baroda is paying 4.90% on its five-year fixed rate account and if five years is too long to lock your money away for, you can still earn 4.30% with its three-year bond."
Both these bonds require a minimum investment of £500, and you cannot make any withdrawals or close the account during the fixed rate term.
Other competitive fixed rate bonds include ICICI Bank's three-year Fixed Rate Bond paying 4.15% on a minimum investment of £1,000, which again does not allow withdrawals or early closure.
Consider paying down debts too
While the cost of living remains so high, try to focus on paying down debts as well as saving. Using just some of your income to pay off debts can make a substantial difference to your finances, particularly while interest rates on savings are still relatively low.
According to research by moneysupermarket.com, making the minimum 2.5% repayment each month on a credit card balance of £2,500 can take cardholders up to 25 years to pay off, and cost a massive interest charge of £3,277, based on a typical APR of 18.9%.
However, by making an overpayment of just £10 a month, you can reduce the time taken to pay off the balance by 13 years and five months, and save yourself £2,019 in interest.
Kevin added: "As well as maximising the returns you make on your savings, look at other ways to reduce the impact of inflation on your family finances: spend wisely; use discount vouchers and focus on repaying any outstanding debts.
"These are all things which can free up some extra cash and help relieve the financial strain many households are currently facing."
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