Rate of inflation falls again

Posted on June 21st, 2012 | Categories - News

New figures show that inflation has fallen to its lowest level since early 2010.

Data released by the Office for National Statistics (ONS) shows that the Consumer Prices Index (CPI) fell to 2.8% in May from 3% in April. The Retail Prices Index (RPI), which includes housing costs, also fell, this time from 3.5% in April to 3.1%.

Reasons for the fall in rate of inflation

At its peak, in September 2011, the rate of inflation rose to 5.2%, however since then it has gradually fallen, albeit with a couple of jumps back up along the way.

Inflation Rate

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The main reasons behind the downward trend seem to be the lessening impact of the VAT rise, and falls in the prices of food, energy, oil and commodities as a whole.

Experts predict that the rate of inflation will continue to slow as energy bills rise less slowly than they did a year ago and fuel prices reduce.

More quantitative easing?

The continued fall in the annual rate of inflation makes additional quantitative easing (QE) measures more likely.

QE is used by the Bank of England to stimulate the economy and £325 billion has already been injected using this method. It is however thought by many to add to inflationary pressures in the economy, but with the rate of inflation actually falling many experts feel that the Bank may see this as an opportunity to extend their program of QE.

Some experts also predict a further cut in interest rates to either 0.25% or even 0% as the bank seek alternative ways to stimulate economic growth.

Winners & losers

A fall in the rate of inflation is a mixed blessing, helping some whilst causing problems for others.

People on low or fixed incomes are definitely winners from the recent slowdown in the rate prices are rising, especially when wage inflation is so low.

Savers, at least in the short term, will also find it easier to get a return which beats inflation. A few months ago even the best savings interest rates were struggling to keep up with inflation, now a basic rate tax payer only needs to use one year fixed rate bonds to beat inflation.

However if the Bank use this week’s inflation numbers as a reason to cut interest rates further, savers will again lose out from policies designed to help the economic recovery.

The major losers though will be those people approaching retirement who will be adversely affected by any extension in QE.

One of the side effects of QE is a reduction in gilt yields, which in turn push Annuity rates lower. Any pension calculator will show that Annuity rates have dropped by around 12% over the past year including a 3% fall in May alone. Further QE is likely to push Annuity rates even lower causing a real headache for would-be retirees and potentially reducing their income for the rest of their life.

Retirees wanting to use Income Drawdown, the traditional alternative to an Annuity, will also be affected by QE as the maximum income available is pegged to gilt yields, which as we all know are falling.

Our team of Independent Financial Advisers in Nottingham are experienced in making savings and investments work harder for you as well as helping you get the best possible retirement income. If would like advice on your savings, investments, or retirement call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk