Good news on inflation


With Brexit filling the financial pages, you might easily have missed some very good financial news.
UK inflation was unexpectedly down in September.
Inflation affects everyone, and even those who glaze over when economics are mentioned care about the cost of living. Inflation means savings are worth less and everything you buy, from a loaf of bread to your home, costs more. So, a fall is cause for celebration.
There are actually several ways to measure inflation. The most common is the consumer prices index (CPI). CPI inflation slumped to 2.4% in September, down from 2.7% in August, despite widespread expectations of a rise. CPIH, which includes owner occupiers’ housing costs, is even lower – a mere 2.2%.
It looks as though inflation is getting close to the Bank of England’s target of 2%, and that the rate rise in August may have worked. But what does it mean for the UK in general, and your money in particular?

What exactly happened?

Inflation remained static at 2.4% between April and June before beginning to increase in July. By August, it was 2.7%, and while City analysts believed it might fall back a little, the size of the drop seems to have come as a surprise.

The Office for National Statistics explained that food prices were the main downward force on the figures, and that clothing and transport both fell too. But there may be something more fundamental going on. Core inflation, which strips out volatile food and fuel prices, also fell from 2.1% in August to 1.9%.

So the rate rise may not be the only factor. Higher costs of imports thanks to the weak Pound may have worked through the system.

More money in your pocket?

Average wages were up 3.1% in August, the biggest rise in almost a decade and a little higher than inflation at last. While not enough to build a feel-good factor, it may be just enough to increase purchasing power and help boost consumption. The economy feels the benefit when more people have more money to spend – particularly with the Christmas buying season coming.

No need for another rate hike?

If core inflation and services inflation stay low, there may be no need for the Bank of England to increase Base Rate again in the near future. Homebuyers with tracker mortgages can breathe a sigh of relief, while businesses might be encouraged to reinvest.

It will also mean that Sterling will stay unattractive for traders, and the pound did in fact fall again against the dollar in the wake of the inflation news.

This will mean that UK exports stay a little more attractive to the rest of the world, providing a small, but real boost to the economy.

Good news for pensioners

Inflation may have fallen, but it is still active enough to bring good news for pensioners. Under the triple lock, State Pension increases from April 2019 by a rate equal to 2018’s CPI, earnings growth or 2.5%, whichever is the greater. Pensioners can expect to see their pension rise by 2.6%.

The outlook for the economy – and your money

The fall in inflation is welcome, but it means the Bank of England is more likely to leave rates unchanged until there is some clarity over Brexit. How good that news is may depend on whether you are a saver, a homebuyer or an investor. Whatever your situation, at Continuum, we would be pleased to help.

The value of your pension and investments, and the income they produce, can fall as well as rise and you may get back less than you invested.

Book a free initial consultation

Book an initial consultation with one of our independent financial advisers or call us on 0345 643 0770 if you would like to discuss further.

Sources:

ons.gov.uk – Inflation and price indices – September 2018

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