Inflation falls to 15-year low
Savers were buoyed today by news that inflation fell to just 0.5% in December 2014 - its lowest point since May 2000, according to the Office for National Statistics (ONS).
It means a total of 510 savings accounts now beat inflation - up from 365 accounts last month, according to Moneyfacts. A basic-rate taxpayer now needs to find a savings account paying just 0.63% a year if they are to protect their cash from the ravages of inflation. That rises to 0.83% for higher-rate taxpayers.
Moneyfacts said the total of 510 inflation-proof savings accounts is spread across the Isa and non-Isa market, with 331 non-Isa accounts (including 213 fixed-rate bonds, 44 notice accounts and 75 no notice accounts), and 179 cash Isas.
The ONS said the reason for the dramatic fall in inflation was the plummeting price of oil, which hit a five-year low of $46 per barrel on Monday. This decrease is being passed on at the pumps and via lower gas and electricity prices.
In the year to December 2014 motor fuel prices fell by 10.5% while lower gas and electricity prices meant that the cost of household goods and service fell by 0.32% in the 12 months to 31 December.
The ongoing price war between supermarkets means that food prices have also fallen by 1.9% in the past year, which along with fuel is usually one of the main causes of inflation.
The dramatic fall means that inflation is now well below the Bank of England's 2% target, with the Office for Budget Responsibility stating that it expects CPI inflation will remain below this level until 2017.
It has also caused some to speculate that the UK could be heading for a period of deflation.
Tom Stevenson, investment director at Fidelity, said: "While cheaper fuel gives consumers more spending power, we are worryingly close to outright deflation now. Persistently falling prices are unsurprisingly the biggest fear stalking financial markets today; ‘good’ deflation of increased purchasing power but stable wages does not tend to last for long."
However, others pointed to the fact that after stripping out the effect of lower energy prices UK core inflation actually rose from 1.2% in November to 1.3% in December, indicating that any falls caused by a lower oil price may only be temporary.
This article was written for our sister website Money Observer
Office for Budget Responsibility
Formed in May 2010, the OBR makes an independent assessment of the public finances and the economy, the public sector balance sheet and the long-term sustainability of the public finances. The OBR has four man priorities: to produce two forecasts a year for the economy and public finances, to judge the progress the government has made towards meetings its fiscal targets, to assess the long-term sustainability of the public finances and to scrutinise the Treasury’s costing of Budget measures.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.
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).
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).