The Consumer Prices Index measure of inflation fell to 4.2% in December from 4.8% in November, spelling good news for beleaguered savers who spent much of 2011 battling against rising prices.
The last time there was such a large fall in the inflation rate was April 2009, when the economy was in deep recession.
However, unfortunately there is a long way to go before savers are out of the woods. To beat inflation, basic rate tax payers still need an account paying at least 5.26% to gain benefit in real terms from their savings, increasing to 7.01% for higher rate tax payers, and a massive 8.41% for 50 per cent tax payers.
Kevin Mountford, MoneySupermarket's savings expert, said: "High inflation combined with low interest rates has had a major impact on UK savers who have struggled to gain any real returns on their savings pots - a particular problem for those who rely on their savings for income.
"Although the majority of savings accounts don't actually beat inflation, making sure your savings are working as hard as possible is still vitally important. The top-paying accounts currently offer rates over six times that of base rate. Putting your money in one of these accounts will reduce the impact inflation has on your pot."
Here, we look at some of the best savings accounts currently available...
Best cash ISAs
One of the best ways to minimise the effects of inflation is to make sure you use your annual individual savings account (ISA) allowance every year.
You can invest up to £5,340 into a cash ISA tax-free this year (to April 5), and the same amount into stocks and shares. Or you can invest the full £10,680 allowance into stocks and shares alone.
If you have yet to use your ISA allowance and want access to your savings, then Nationwide's Online ISA pays an impressive 3.10% annual interest, but this rate is only available to those with at least £25,000 or more to invest. Savers who pay in the minimum £1,000 permitted to open this account earn a lower rate of 2.75%. Alternatively, ING Direct's cash ISA pays 3.00% annual interest on a minimum investment of £1, and this rate is guaranteed for a year.
The top rates of interest, however, go to those who are prepared to tie up their savings in a fixed rate ISA for several years - one of the only ways to actually beat inflation.
For example, Bank of Ireland's market-leading five-year Fixed Rate ISA pays 4.50% annual interest a year on a minimum deposit of £100. The bank pays 4.20% on its 4-year Fixed Rate ISA which can be opened with the same amount. Both accounts accept transfers in from other providers.
If you can't afford to lock up your money for that long, then Bank of Ireland also offers the market-leading rate on its 18-month Fixed Rate ISA, at 3.50%. And if you only want to invest for a year, then Northern Rock's Fixed Rate Cash ISA pays 3.00% on a minimum investment of £500.
Top easy access accounts
Everyone should have some money in an easy access account that they can get their hands on quickly in the event of an emergency.
If you have £10,000 or more to invest, West Bromwich Building Society's Direct Bonus Account 3 pays an impressive 3.13% annual interest before tax. Savers with balances that then fall below this level will earn a much lower rate of 1.75% a year.
The rate includes a 1.38% bonus until February 28 next year, so you may want to move your money when this disappears. It's also worth bearing in mind that only four withdrawals are allowed from this account in any one year. If you make any more than this, you will be charged 90 days' interest on the amount withdrawn.
If you don't have a large lump sum available, Santander's eSaver Issue 4 account pays 3.10% before tax on a minimum investment of £1, although this rate includes a steep 2.60% bonus for the first 12 months. This account allows unlimited withdrawals.
Fix for highest returns
Fixed rate bonds currently pay among the highest savings rates, but you must be prepared to tie up your cash for the fixed rate term as most don't allow withdrawals. Remember too that if you are considering a longer-term fixed rate bond, while the returns on offer might look competitive now, once interest rates start to rise they might not seem quite as appealing.
For shorter-term savers, there are plenty of accounts paying respectable rates of interest.
Vanquis Bank is paying 3.85% on its two-year Fixed Rate Bond, which can be opened with £1,000. Its one-year Fixed Rate Bond pays 3.35% if you only want to lock up your money for a year.
Alternatively, Allied Irish Bank is paying 3.90% on a minimum investment of £1,000 held in its two-year Fixed Rate Bond. If you are a longer term saver, Halifax pays 4.30% on a minimum investment held in its four-year Fixed Online Saver account, which is the market-leading rate over this period.
Index-linked bonds
Be wary about investing in an index-linked account in order to beat inflation. Savers have piled into these recently to ensure their savings keep pace with the rising cost of living - but with inflation now on the way down, they no longer look quite as appealing.
When inflation is high, then these accounts offer an excellent way to ensure your savings will maintain their purchasing power. But if inflation continues to fall, 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.
Another drawback is that you can't get access to your savings during the investment term, so you will need to be certain you can afford to tie up your money for three, five or six years, depending on which account you choose.
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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