Inflation rate slows to lowest on record
The speed at which prices have been rising in the UK slowed to the lowest rate on record of just 0.3% in the year to January 2015, providing a boost to the nation's savers.
This means that a basket of goods and services that cost £100 in January 2014, when the inflation rate was 1.9%, would have cost £100.30 in January 2015.
Falling petrol and food prices were the reasons for the slowdown, said the Office for National Statistics, which compiles the Consumer Prices Index measure of inflation.
The average petrol price fell by 8.5p a litre between December 2014 and January 2015 to 108.3p and the average diesel price by 7.3p to 115.6p. Petrol is now at its lowest price since November 2009 and diesel since February 2010, the ONS added.
The price of food and non-alcoholic drinks, meanwhile, fell by 0.7% during the period. The most notable price reductions were for two-pint cartons of milk and a range of fruits.
Boost to consumer spending
Adrian Lowcock, head of investing at AXA Wealth, said: "Falls in petrol and food prices should be viewed positively as it gives a boost to consumer spending in coming months as real disposable incomes rise."
Falling inflation rate is reasonably good news for savers too as it means there are now 558 savings accounts that will beat inflation after tax, according to Moneyfacts – up from 510 accounts last month. However, Sylvia Waycot, editor of Moneyfacts.co.uk, warned that the long-term effects of inflation mean savers' cash does not go as far as it used to.
"After tax and inflation, the average interest paid on easy access savings accounts isn't even enough to buy you one sausage a week. The average interest paid on easy access accounts is just 0.66%, while across the Isa range it's still miserable at 1.44%, even less than last year when it was 1.65%.
"Inflation has hit a new low, and although this helps today's savings interest go further, it still won't get you a sausage."
Apart from two upticks in April and June 2014, inflation has been slowing continuously every month since June 2013 – when it exceeded the Bank of England's 2% target by nine percentage points.
Last week, the Bank of England governor Mark Careny said inflation could turn negative (a situation of deflation) temporarily in the spring as a result of falling global oil prices. Deflation occurs when aggregate price levels fall instead of rise.
While that may sound like a good thing, it isn't. Falling prices can put people, businesses and governments off spending money as they hold out for even lower prices. This in turn can lead to a lack of economic activity and then to more unemployment.
And while inflation can be controlled in part by raising interest rates, it's much trickier to get a firm grip on deflation because there's a limit as to how much interest rates can be cut.
The Bank of England base rate is already at a historic low of 0.5%, but Carney has said if low inflation persists then the Bank will consider further cuts.
With CPI inflation now at 0.3%, a basic-rate taxpayer getting taxed on their earnings at 20% needs a savings account paying 0.38% a year to beat inflation.
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.
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).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
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.