Sharp fall in the rate of inflation

Posted on May 22nd, 2012 | Categories - News

Figures released today by the Office for National Statistics have shown a sharp fall in the rate of inflation.

The Consumer Prices Index (CPI) fell by 0.5% in April to 3%, whilst there was a smaller fall in the Retail Prices Index (RPI) which dropped by 0.1% to 3.5%.

 

The falls take inflation to its lowest level for two years and is being seen by some financial experts as part of a downward trend since September 2011 when CPI stood at 5.2% and RPI was 5.8%.

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Welcome news

The fall in the rate of inflation will be welcome news for many, especially those people on fixed incomes who have struggled with recent rises in the cost of living and also those people with savings where interest rates have failed to keep pace with inflation.

Until today’s announcement a basic rate tax payer would have had to tie up their savings in four year fixed rate bonds or indeed five year fixed rate bonds to get an interest rate above inflation; something many savers were unwilling to do in the hope that interest rates might rise in the future.

However, after today’s figures a saver only needs to tie up their savings in a two year fixed rate bond to beat inflation.

More Quantitative Easing?

The sharp fall in the rate of inflation, as measured by CPI, raises the possibility of the Bank of England’s Monetary Policy Committee voting for further Quantitative Easing (QE) an idea also promoted today by the International Monetary Fund (IMF) who are currently visiting the UK.

Both the Bank and IMF believe inflation will continue to fall, which would be good news for savers, even if a proposed cut in interest rates would not.

In an effort to boost the economy the IMF also said that the Bank of England should consider a further cut in interest rates to 0.25% or even 0% and the government should consider a temporary reduction in VAT.