Inflation drops to 0.3% as air fares and clothing prices fall

17 May 2016

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.

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