Inflation falls to 2.2%
The Consumer Prices Index (CPI) has fallen to its lowest level in nearly three years, but savers are being warned not to get to used it.
The UK inflation measure fell from 2.5% to 2.2% in September, the closest it has got to the Bank of England's 2% target since the end of 2009.
The main factors that have led to the downward movement are steady food prices and last year's rise in utility prices dropping out of the annual comparison, as the change was more than 12 months ago.
However, with consumers now being told to expect price hikes from their energy companies of 6% or more, next month's announcement is likely to see the inflation rate rebound slightly, especially when increased tuition fees are added into the basket of goods on which the rate is measured.
Threat to retirement income
Despite the fall, Andrew Tully, pensions technical director at MGM Advantage, says inflation remains a real threat to retirement income. According to MGM Advantage, more than 90% of consumers purchase level incomes when they retire, which means their real spending power is gradually reduced even if inflation is only growing slowly.
The impact of inflation on savings means that £10,000 invested five years ago would have the spending power of just £8,902 says Sylvia Waycot, spokesperson for Moneyfacts. "Although today's fall in inflation is welcomed, it is hardly cause to celebrate," she says.
To beat inflation, a basic-rate taxpayer needs to find a savings account paying 2.75% per year, while a higher-rate taxpayer needs to find an account paying at least 3.66%.
The Retail Prices Index measure of inflation, which includes mortgage payments, stood at 2.6% in September, down from 2.9% the month before.
This article was written for our sister website Money Observer
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).