Good news for pensioners as deflation returns to the UK

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Inflation, as measured by the consumer prices index (CPI), fell into negative territory in September 2015 – for the second time this year, according to the Office for National Statistics (ONS).

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.”

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