Inflation falls to five-year low

Hot air baloons

Inflation has fallen to its lowest point in five years, with prices rising by approximately 1.5% over the 12 months to August, down from 1.6% in July.

In its most recent inflation figures, the Office for National Statistics reports that the rise in the consumer prices index, which measures the price of a basket of goods, was largely fuelled by increases in clothing, transport services and alcohol costs.

According to Ben Brettell, senior economist at Hargreaves Lansdown, the latest figures relieve pressure on the Bank of England (BoE) to raise interest rates in the near future.

"With inflation at a five-year low, it is difficult to see why the BoE should even consider raising interest rates at present. We are faced with uncertainty around the Scottish referendum, and there are signs that the economy is slowing somewhat, with UK manufacturing activity growing at its slowest rate in 14 months in August.

"Inflationary pressures remain notable by their absence. Wage growth is yet to materialise [with latest figures expected to show meagre 0.5% growth], meaning we aren't suffering the traditional wage-price spiral."

He adds that he expects inflation to remain 'well below' the BoE's 2% target for the rest of 2014 and in to 2015.

'Poor show'

According to retirement income specialist MGM Advantage, households will need an extra £381 a year on average to maintain the same buying power as they had the previous year.

But inflation-beating savings accounts are a little easier to find. Comparison website says that at this rate of inflation a basic-rate taxpayer needs to find a savings account paying 1.88% per year, while a higher-rate taxpayer needs to find one paying at least 2.5%.

However, of the 643 non-Isa accounts in the market, only 107 offer the minimum required for basic taxpayers to beat the corroding effects of tax and inflation. Just over half of the 224 Isas on the market achieve this.

Moneyfacts editor Sylvia Waycot says: "Inflation may have fallen, but thanks to the paltry interest paid on savings, it is actually making little difference to savers after the taxman has had his share.

"This makes Isas the obvious choice for any taxpaying saver, but sadly even these accounts are losing their sparkle as many providers put little effort into attracting Isa money.

"Poor show, savings providers."

This article was written for our sister website Money Observer


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