Deflation spells bad news for savers and pensioners
As for much of the last year, deflation was attributed to lower food and transport prices, which fell by 2.6% and 2.7% respectively.
Inflation has hovered around 0% throughout 2015, primarily due to low oil prices, after they collapsed in late 2014. Due to the way inflation is measured, this could lead to inflation starting to rise again towards the end of this year.
Ian Forrester, analyst at The Share Centre, explained: “Investors should acknowledge that despite this being the weakest spell of inflation in more than 50 years, from November onwards, the market expects to see inflation rise as the impact of last year’s steep fall in the oil price begins to work its way out of official calculations.”
As a number of commentators have observed, lower inflation is likely to stop the BoE from raising interest rates, an action it has repeatedly pushed back since September last year and which governor Carney recently hinted may not happen until 2017.
This is likely to be bad news for cash savers and pensioners, both of whom have seen their income eroded by low interest rates since the BoE lowered rates to their current level of 0.5% in 2010. This has pushed many savers into the stock market, where equities have offered a better income.
Maike Currie, associate investment director at Fidelity International, believes this trend is set to continue: “The Bank of England's suggestion that interest rates may stay at rock bottom throughout next year may just be the start of it.
“Interest rates could stay low for the foreseeable future if low inflation turns out to be less cyclical than structural. In a low interest-rate environment, investors continue to view equity income as a safe haven and a rare source of yield.”
Separate figures published by the Office for National Statistics found house price inflation was 6.4% over the year to September, and a LandBay report on rental prices found these are rising faster still.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
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).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
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).