So should we all be hitting the shops while the going is good? Not quite…
What’s caused negative inflation?
The Consumer Prices Index (CPI) measure of inflation charts the cost of everyday items year-on-year, using a ‘typical shopping basket’ of the day. Typically, these prices rise over time – but as wages rise too, it should all be relative.
However, since the start of this year, everyday costs have become cheaper. Oil prices have fallen, which means motorists are paying less for their petrol. And the ongoing price war between supermarkets (many followed Asda’s lead and cut their prices in April), has also meant the cost of our weekly grocery shop has fallen.
(Mortgage rates are also getting cheaper – though, actually housing costs are not factored into CPI. They are measured as part of RPI (Retail Prices Index) instead which stood at 0.9% in April.)
The fact that CPI has now fallen into negative territories means we have more money in our pocket – but it’s not necessarily all good news. Take a look at our round-up of how negative inflation could affect you for the better or worse:
Good for your pocket
- Prices are cheaper: First and foremost, negative inflation means your money will stretch that little bit further. For example, a shopping basket items that set you back £100 in April 2014, would have cost you £99.90 in April this year.
Bank of England Governor, Mark Carney said last week: “The British people should enjoy this period of very low energy prices, very low food prices – and enjoy it while it lasts.”
- Safety for pensioners: Under the ‘triple lock’ system, state pensions increase by whichever figure is highest; inflation, wage growth or 2.5%. In April, pensioners’ state pensions would have benefitted from the safeguard of the 2.5% option.
- Cheaper mortgages: If prices are either stable or falling, people have more disposable income which (broadly speaking) means they will need to borrow less. And when demand for loans is reduced, lenders offer lower interest rates. This means mortgage rates could remain competitive or even get cheaper.
- Renting through the council: Some housing associations and social landlords set their rents in line with CPI + 1%. While this figure is usually taken from the CPI figure each September, if negative inflation continues for another four months, rents could increase by just 1%.
Not-so-good for your pocket
- Savings returns will be disappointing: Negative inflation means that interest rates will remain low. Savers will already be well aware that returns on savings accounts are not as favourable as they have been compared to previous years, and negative inflation will only prolong disappointing saving rates.
- Negotiations for pay increases: Employment unions often use inflation as a bargaining tool when it comes to getting wage increases for their members. Falling CPI won’t support this argument.
What’s the difference between negative inflation and deflation?
Deflation is typically attributed to a sustained period of negative growth – such as has been the case in Japan over the past two decades. When prices are falling, people tend to put off making purchases in case they fall further. This creates a ‘deflationary spiral’ which can spell several years of disappointing growth or stagnation.
Negative inflation is when CPI (or another measure) is seen as temporarily dipping below that 0% threshold – as is the case now. In fact, Chancellor, George Osborne has also affirmed that measures are in place to prevent deflationary risks affecting the economy.
In the meantime, we’d be inclined to take the advice of Mark Carney and make the most of a temporary drop in prices while they are still around.
Did you know? The Bank of England is responsible for keeping the CPI measure of inflation as close to the government’s target of 2% as possible.
Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.