Fall in inflation of "little comfort" to cash-strapped families

Hot air balloons

Inflation, as measured by the consumer prices index (CPI), fell sharply in May 2014 to 1.5% - down from 2.7% this time last year - but the drop is "of little comfort to financially vulnerable families", a leading debt charity warned.

The 0.3 percentage point fall from the 1.8% seen in April 2014 was greater than expected, caused by a drop in the cost of food and non-alcoholic beverages, clothing and footwear, furniture and household goods and communication.

Areas where the cost of living increased in the year to May included recreation and culture and alcohol and tobacco.

Trevor Welsh, head of UK sovereign and inflation at Aviva Investors, said the shock drop in inflation was primarily caused by "the timing of Easter and the supermarket price war, which resulted in food and seasonal food prices falling sharply."

It means that someone paying basic rate tax at 20% now needs to find a savings account paying an annual rate of 1.88%, while higher rate taxpayers needs to find an account paying at least 2.50%, according to Moneyfacts. It added that there are 187 savings accounts that will now beat inflation.

Little benefit

But Francis McGee, director of External Affairs at StepChange Debt Charity, warned that cash-strapped families will see little benefit. "Inflation may be down, but it remains well above the level of average earnings, which grew just 0.7% in the three months to April," he explained.

"Family finances are still dangerously exposed to risks of problem debt - seven million people are so financially vulnerable that they do not have the savings to survive even a week if their income was to drop by a quarter."

McGee added that the outlook for the financially vulnerable remains worrying, given fears that continued low inflation could lead to an imminent rise in interest rates by the Bank of England: "As the overall economy looks to recover, and interest rates inevitably rise, we must make sure that safety nets are put in place to make sure these families are not forced to turn to high-cost credit to make ends meet."

In a separate statement released today, the Office for National Statistics reports that UK house prices increased by 9.9% in the year to end April 2014, up from 8% in the year to March 2014. This was once again driven largely by price rises in London and the South East, where home values surged in value by 18.7% and 8.9% respectively.

Governor of the Bank of England Mark Carney warned last month that a housing bubble was the greatest threat to the UK economic recovery, adding last week that interest rates could rise "sooner than markets expect", which could curb soaring house prices.

However, today's CPI figure could prompt a change in direction as rising interest rates would likely depress inflation further, warned Kathleen Brooks, research director at Forex.com.


More about