Inflation falls to 15-year low

Inflation chart

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


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