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Inflation falls: good news for pensioners and savers

Ed Bowsher
by Lovemoney Staff Ed Bowsher on 16 October 2012  |  Comments 19 comments

The economy may be struggling to grow, but at least inflation is falling.

Inflation falls: good news for pensioners and savers

Prices have been rising more slowly in recent months, and that was confirmed today when we learned that the government’s favourite measure of inflation – the consumer prices index (CPI) - rose by just 2.2% in September. That’s down from 2.5% in August.

In other words, prices were, on average, 2.2% higher in September 2012 than they were a year earlier.

This is the lowest rate of inflation since November 2009 when the CPI rose by 1.9%.

The other main measure of inflation – the retail prices index (RPI), which includes mortgage payments - is also on a downward path, falling from 2.9% in August to 2.6% in August.

I think there are two main explanations for this fall. Firstly, there were some big rises in utility prices in September 2011, and that boosted inflation figures up to this August.

And secondly, the economy has been sluggish. When times are tough, businesses try to keep prices stable and that can keep inflation down.

What does this mean?

Today’s news is great news for pensioners and savers. If inflation is low, it’s easier to generate an inflation-beating return from your savings. In recent years, inflation has eroded the value of many pensioners’ retirement nest eggs.

Low inflation also means that an increase in the Bank of England’s base rate is even less likely than it already was. What’s more, another round of money creation – known as QE – is now more likely.

On the other hand, it's not such good news for those claiming benefits such as Jobseeker's Allowance, as the CPI level for September is normally used to measure how much benefit payments will go up the following April.

What next?

Sadly, inflation will probably pick up in the next month or two. That’s because food prices are rising after poor weather this summer in both the UK and US. Gas and electricity bills are also on the up again.

That said, I’d still be very surprised if inflation really took off again. I doubt it will go over 4% any time soon. The economy is still sluggish and businesses have plenty of spare capacity. In other words, if the economy did pick up, many businesses could easily increase production and so wouldn’t have to increase prices.

The economic outlook for 2013 is depressing: slow economic growth and fairly subdued inflation. But heck, at least savers have got something to be cheerful about this morning!

More:
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Comments (19)

  • MK22
    Love rating 149
    MK22 said

    Of course the rate of inflation is lower in September, because that is the rate used for pensions increases. I'm sure the fat prats in Government will be spouting about how their 2.5% "safety net" means pensioners get a better than inflation rise. Ever asked yourself why gas and electricity price rises don't occur in September? What we pensioners actually want to see is a September CPI of over 5% to give us a pensions rise vaguely like the inflation we have seen over the the last 12 months.

    And like dampflok I paid NI from the earliest age I was allowed to until I was forced into retirement, well in excess of 40 years. But I still feel sorry for the hard working kids of today who will have to pay NI for, hmm, 30 years is it, in order to get a full state pension.

    Report on 17 October 2012  |  Love thisLove  0 loves
  • Arblaster
    Love rating 40
    Arblaster said

    Hi Ed

    I think you need to find yourself another financial guru. Dr Marc Faber is good...and right. Nouriel Roubini seems to know what is going on, too.

    Krugman has consistently said that, in our current economic circumstances, QE wouldn't trigger big rises in inflation, and he's been proved right.

    QE IS inflation, Ed. The currency loses value. That means that every stimulus package -QE4, 5, 6, whatever - would need to be bigger than the last. A few billion here, there, will not stimulate the economy anymore.

    Not that the economy needs to be stimulated. That is what got us into this mess in the first place. British industry - last I heard - was only 12 percent of GDP. If you kick-start the economy, all that will happen is that people will spend their money on imported goods. That is how this country got into this condition in the first place. The answer is the good old "Export to survive".

    That means that the businesses that are failing should be left to fail, and the vast army of civil servants and local government plonkers should be fired. There is no other way.

    For once I agree with Gideon Osborne and Cameron. I just don't think they are being tough enough. The longer they pussyfoot about bringing in swingeing austerity measures, the worse it is going to get.

    You said:

    I'll probably be told that we have had high inflation in recent years. But since 2009, our highest rate has been 5%, which is historically low. The problem has been that inflation-adjusted interest rates have been very low, which has been tough for savers.

    I told you, Ed, to ignore the "inflation" figures spewed out by a government department. The people who compile these figures are no more "independent" than the bank of England is. 5 percent indeed. A few months back, the price of a 2nd class stamp went up nearly 40 percent. Because of the rise in postage rates, it is almost impossible now for the small business to send stuff abroad. I have also told you elsewhere, Ed, that the low interest rates are caused by the BoE printing money to buy their own bonds in order to keep the interest rates low; that is the definition of quantitative easing.

    Krugman is someone who tells the politicians what they want to hear: that all they have to do is print a trillion dollars or so, and the recession will go away. It won't, Ed. Either you will tighten your belt through austerity measures or through hyperinflation. I'd rather the former: there will be fewer dead old age pensioners.

    Report on 19 October 2012  |  Love thisLove  0 loves

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