What does tumbling inflation mean for YOU?

Inflation hit a five-year low of 1.2% last month, as measured by the Consumer Prices Index (CPI).

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But what does lower inflation mean for you?

What is the CPI measure of inflation?

The CPI is a collection of goods and service used to monitor rises and falls in the cost of living.

It includes everyday items such as petrol, groceries and postage stamps as well as luxuries such as tablet computers and air fares.

Unlike the Retail Prices Index (RPI), it does not include housing costs such as mortgage payments and council tax.

When was inflation last this low?

The latest figures from the Office of National Statistics (ONS) show that CPI inflation was 1.2% in September, down from 1.5% in August.

That’s the lowest the rate has fallen since September 2009, when it was 1.1%. It has halved from the 3% figure recorded in September 2013.

Why has inflation fallen?

Lower energy costs and food prices helped to push the September rate of inflation down to 1.2%.

The cost of travelling by boat or plane has also dropped, as have the prices of recreational goods such as games consoles.

What should the rate of inflation be?

The Bank of England, in consultation with the Treasury, wants the CPI rate of inflation to be around 2%.

That means the latest recorded rate of 1.2% is on the low side. If inflation falls to 1%, the Governor of the Bank, Mark Carney, will have to write to George Osborne, the Chancellor of the Exchequer, to explain how the situation will be remedied.

But why would inflation at 1% be a bad thing?

“The cost of travelling by boat or plane has also dropped, as have the prices of recreational goods such as games consoles.”

There’s an old saying: if you laid all the economists in the world end to end, they still wouldn’t reach a conclusion.

In other words, there are long and heated debates about the merits of low inflation and its impact on the wider economy.

But the consensus is that economic growth requires a degree of inflation, and that a lack of inflation leads to economic stagnation.

An example would be the Japanese economy, which has suffered deflation since the early 1990s and has achieved little if any economic growth during that period.

But will lower inflation at least make things cheaper for me?

Depends how you look at it. Inflation has fallen, but prices are still increasing by 1.2%. What’s happened is that the increase isn’t as steep as in previous months.

But there are some bright spots where we seeing actual declines.

The average cost of fuel, for example, has fallen by 6% since this time last year – and the latest supermarket fuel price war will only push prices lower. And food prices are down 1.5% year on year.

But everything is relative. Wage growth is even lower than inflation, with typical earnings up just 0.7%. So life may still feel more expensive, even with prices ‘falling’.

I’ve got borrowings. Does lower inflation mean interest rates on my mortgage or loans will go up?

No. The Bank of England can use interest rates to control inflation – if the rate of inflation goes above 2% it can bring it down by raising rates.

So a lower rate of inflation makes an interest rate increase less likely.

Will lower inflation have an impact on my savings?

Inflation falling to 1.2% means you need a lower rate of interest on your savings to make a profit in real terms (once inflation is taken into account).

But while that makes it easier to earn money on your savings, the rate of inflation falling also helps to keep interest rates low. Indeed, we are already seeing some institutions lowering the rate of interest they pay on ISAs and savings accounts.

Lower inflation is therefore a double-edged sword for savers.

How will lower inflation affect my benefits?

In the past, the rate of inflation recorded in September was used to determine the level of a range of benefits, including the state pension.

But since April 2013, most benefits can only increase by a maximum of 1% a year – whatever the September inflation rate.

And since the “triple lock” commitment was introduced in 2010, the state pension only goes up by the rate of inflation if it is higher than 2.5% (and earnings growth).

Benefits not affected by the 1% cap include Disability Living Allowance, Attendance Allowance and Carer’s Allowance – all of which will go up by 1.2% next April.

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