Inflation down not out
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AS THE UK economy suffers a recordbreaking slump and heads towards recession, last week’s sharp drop in inflation came as no surprise.
Consumer price inflation fell to 0.8 per cent in April, down from 1.5 per cent in March, and experts say price growth could fall lower in the turbulent months ahead.
This will ease the pressure on shoppers’ wallets and protect the value of savers’ money in real terms, but it could hit pension incomes, by hastening the demise of the state pension triple lock.
So who are the winners and losers?
The oil price crash, falling gas and electricity prices, and the collapse in demand for flights and second-hand cars drove inflation lower.
AJ Bell personal finance analyst Laura Suter said as locked-down shoppers stayed at home, clothing and footwear prices also slumped: “The exception was the price of knitting wool, as the nation took up new hobbies.”
Children’s toys, games, crafting kits and computer games also rose in price during the school closures, as did alcohol.
Suter said inflation is hard to calculate as the Office for National Statistics cannot measure around 90 items including a pint of beer, childminding costs, manicures and theatre tickets: “As the UK slowly reopens, we may get a more accurate picture.”
Hargreaves Lansdown personal finance analyst Sarah Coles said savers will find it easier to protect the value of their money in real terms: “You can beat inflation with every kind of savings account, including easy access.”
RCI Bank currently pays 1.05 per cent with easy access, 1.45 per cent fixed for two years or 1.80 per cent over five years.
Some may be tempted to lock in as the Bank of England has mooted cutting base rates from today’s 0.1 per cent into negative territory, which would drive today’s savings rates even lower.
Government-backed National Savings & Investments now offers some of the best rates after reversing planned cuts to support savers. Coles said: “The NS&I Income Bond pays 1.16 per cent, putting it top of the easy access accounts. Its Direct Saver offers 1 per cent, while its easy access cash Isa pays 0.90 per cent.”
Premium Bonds currently offer a relatively generous prize rate of 1.4 per cent tax free, although there is no guarantee you will be a winner.
Persistent low inflation will increase pressure to scrap the state pension triple lock, which guarantees it will increase each year in line with either earnings, prices or 2.5 per cent, whichever is highest.
Steven Cameron, pensions director at insurer Aegon, warned: “With price inflation and earnings growth likely to fall, the Government may struggle to justify state pension increases of at least 2.5 per cent a year.”
Inflation may be plunging today, but some analysts warn it could return at some point, and with a vengeance.
PWC economist Jing Teow said the oil price is already recovering due to production cuts, while demand for energy will increase as lockdowns end.
Governments and central bankers are showering the world with fiscal and monetary stimulus in a bid to save the global economy from Covid-19.
Fidelity Personal Investing director Tom Stevenson said this could feed into much higher inflation: “Investors have already started adding to their holdings of gold, the traditional hedge against rising prices. The precious metal is trading close to a seven-year high.”