Inflation drops to 0.3% as air fares and clothing prices fall
Inflation fell to 0.3% in the year to April, down from 0.5% in March – the first drop since September 2015.
The Office for National Statistics blames the decrease in the Consumer Prices Index (CPI) rate of inflation on the falling price of air fares, clothing, vehicles and social housing rent.
Inflation was prevented from dropping below 0.3% due to the rising price of petrol, food and certain recreational goods, but it’s still far below the Bank of England’s 2% target.
The figures follow the Bank of England base rate being kept at 0.5% for the 86th month in a row, amid stalling growth.
Ben Brettell, senior economist at Hargreaves Lansdown says: “At the moment there is almost no pressure on the Monetary Policy Committee to raise interest rates. The Bank doesn’t expect inflation to reach its 2% target until mid-2018.”
Today’s figures also reveal that the Retail Prices Index (RPI) rate of inflation, which unlike the CPI includes housing costs, stood at 1.3% in the year to April, down from 1.6% in March.
Maike Currie, investment director for personal investing at Fidelity International, warns that falling inflation is a further blow to savers already suffering from low interest rates.
“Low inflation means interest rates will stay lower for longer, making decent investment returns harder to come by. If returns are low, mindless investing is not enough. For example, the FTSE 100 is still below its 1999 peak – which means parking your money in a passive fund tracking Britain’s blue chip index, would have left you with disappointing returns”, she says.
“It’s important to seek out the winners and steer clear of the losers – the right active managers coupled with the power of compounding by reinvesting dividends is a good way to secure solid returns in a low-return world.”
See our guides on How to invest in 2016 and Four easy ways to spot tomorrow’s investment stars.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
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).
Named after a high value gambling chip, the term is used for an investment seen as solid and whose share price is not volatile. Blue chip companies are normally household names and have consistent records of growth, dividend payments, stable management and substantial assets and are the bedrock of a pension fund’s portfolio.
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.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.