Good news for pensioners as deflation returns to the UK
The fall of 0.1%, which mirrors the deflation seen in April 2015, means inflation in the UK has only been positive in three of the past nine months. The September figure was also below analysts' forecasts for 0% growth, with the falling cost of food and motor fuel contributing to the surprise fall.
In the year to September 2015, the ONS says that food prices fell by 2.5% while prices of motor fuels fell by 14.9%. These two groups have provided some of the largest downward contributions to the 12-month rate throughout 2015, thanks to the plummeting cost of oil and an ongoing price war among the UK's largest supermarkets.
Commenting on the data, Vicky Redwood, chief UK economist at Capital Economics, said: “Deflation returned in the UK in September, although it is likely to be another very brief and shallow affair. Inflation could stay negative for another month or two, but it is still likely to rebound at the turn of the year when the previous bigger falls in energy prices drop out of the annual comparison. So we still think that the risks of a more serious period of deflation are low.”
Tom Stevenson of Fidelity Personal Investing said deflation would not hurt pensioners, who would be cheered by the ‘triple lock guarantee’. He explained: “[The September deflation] is much more important than the first one in April because September’s CPI reading is the one used by the government to determine how much the state pension and some benefits rise in the following April as well as the extent to which the Isa annual allowance increases.
“Thanks to the government’s so-called triple lock guarantee, pensioners receive the highest of the September CPI, average earnings growth or 2.5%. Tomorrow we will hear how fast average earnings are increasing but with expectations close to 3% then this will probably be the amount by which the state pension rises next spring. That’s good news for pensioners.”
However, he added that Isa investors and recipients of some benefits, such as disability allowance, as well as those receiving private or public sector pensions linked to CPI, will be less impressed as the amount they receive is unlikely to change next year.
Commenting on what the fall in inflation could mean for UK interest rates, Peter Cameron, associate fund manager at EdenTree Investment Management, added: “Inflation is back in negative territory again and it's very unlikely that we'll see the Bank of England (BoE) raise interest rates this side of Christmas.”
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).
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 individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.