Deflation spells bad news for savers and pensioners

18 November 2015
Inflation stubbornly stuck in negative territory in October, with prices 0.1% lower over the year, according to the latest consumer price index (CPI) figures.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.

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