What falling inflation might mean for you

Inflation has been shaping the economy over the last year or so. It has meant rising prices closely followed by rising interest rates.

But now inflation may be back under control. At Continuum we are looking at what this may mean for you.

What exactly has happened with inflation?

Inflation is simply the term used by economists to describe the speed at which prices are rising.

Statisticians calculate this in various ways, the most familiar being the Consumer Price Index, published each month by the Office for National Statistics.

Back in October 2022 it showed inflation running at a 41-year high of 11.1% and heading the country in the direction of a financial meltdown.

The good news is that the bank of England has started to get inflation back down, averting the crisis. However, they did this with a series of interest rate hikes. 

After years of interest rates so low they were hardly noticeable, the hike to a 16-year high  of 5.25%, in August last year hit hard. But the medicine seems to have worked, and it was announced that inflation has fallen to the government’s target of 2% in May.

What happens now?

The drop will raise hopes that the Bank of England will reduce its Bank Rate over the summer, and with it the cost of borrowing. 

But is it time to celebrate?

The Bank may be reluctant to reduce rates too quickly, to avoid a political gesture in the wake of the election, and ensure that inflation does not simply flare up again. The markets currently seem to be expecting a cut – but not until later in the year, and perhaps only to a cautious 5%, rather than the 4.75% or less that many were hoping.

Rate cuts may be on the way – but probably not for a few months leaving borrowers still facing much higher costs than two years ago.

What does falling inflation mean for your home buying plans?

Inflation was one of the factors that was responsible for high mortgage rates, making getting on the housing ladder harder for first time buyers, and creating problems for existing homeowners coming off ultra-low fixed rate deals.

The average two-year fixed rate mortgage is currently 5.93%, according to analyst Moneyfacts. 

What will happen now inflation has fallen? Two facts are already clear. The first is the high rates have discouraged house price inflation.

The second is that some lenders may already be looking at cutting the cost of fixed rate deals, where interest rates are priced based on swap rates – market expectations of where the Bank Rate will be in the future. 

Now is the time to take advantage of them.

You can start reviewing your mortgage up to six months in advance. If rates then go up before you need to finalise your loan you are safe, but if they fall you can choose a better rate. Call us at Continuum to find the most appropriate deal for you.

What could falling inflation mean for your savings?

Falling inflation means that saving may be worthwhile again. High inflation and low rates meant that the value of your savings was eaten away faster than interest could build them up.  Now the reverse is true, and you can achieve real growth by saving in a suitable account.

But you may need to act fast. Rates are already starting to fall from the 6% highs of late last year in anticipation of a bank rate cut.

There could still be time to lock your savings rates. It can be as simple as finding a fixed-term account if there’s cash you won’t need to access for at least a year. Longer term rates may be available. Call us at Continuum to find ways to help keep your money working harder for longer.

What could falling inflation mean for your pensions and investments?

The stock market is not directly linked to inflation or the Bank Rate, but the combination of easing inflation, the prospect of lower borrowing costs and an improving UK growth outlook should potentially prove supportive for UK equities.

As UK equity valuations remain very cheap compared to global equities, it could be time to look at equity investment.

On the other hand, it might be time to reconsider bond investment. Many pensions hold a high proportion of bonds as you reach retirement, to shield your money from market fluctuations.

Bonds can look less attractive in periods of lower inflation.

It could be time to get an investment expert to look at your investment portfolio in the light of falling inflation. A call to us at Continuum could provide it.

What should you do about falling inflation?

Falling inflation will affect every aspect of your financial planning, from the amount of wealth you need to accumulate to help you reach your goals to the most appropriate ways to acquire it. At Continuum we can take an expert view of the changes you need to make. To discuss them, call us today.


As it happened: Coping with inflation: ‘You can’t cut back on nothing’ – BBC News

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice, or a recommendation to a particular saving or investment strategy you should seek independent financial advice before embarking on any course of action.

A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken. Pension savings are at risk of being eroded by inflation.

The value and returns of an investment are not guaranteed, investors may lose some or all of their investment. Capital is at risk.

Investments do not include the same security of capital which is afforded with a deposit account.

The Financial Conduct Authority does not regulate deposit accounts or taxation advice.

Your home or property may be repossessed if you do not keep up payments on your mortgage.

You may have to pay an early repayment charge to your mortgage lender if you pay down your mortgage.

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