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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:
The top fixed rate savings bonds

M&S Bank offers regular saver account paying 6%

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Comments (19)

  • RogerW
    Love rating 2
    RogerW said

    Have you forgotten that it is the September rate which sets the increase in the state pension next year. OAPs need a high rate in Sept and a low in October to really win

    Report on 16 October 2012  |  Love thisLove  2 loves
  • isobelsgrandma
    Love rating 35
    isobelsgrandma said

    Took the words right out of my mouth, Roger.

    Report on 16 October 2012  |  Love thisLove  1 love
  • muira
    Love rating 30
    muira said

    great news..cheerful this morning??

    only going to last a month..outlook depressing,

    energy bills to rocket,more qe,higher food bills

    only had a few seconds of happiness..then impending doom!!!

    i will hold my breath for the savings bonanza i am about to encounter

    definetely politician material..ps can i order my sunseeker yacht yet???

    Report on 16 October 2012  |  Love thisLove  0 loves
  • Timperly
    Love rating 5
    Timperly said

    Please don't confuse RPI and CPI with what is really happening- everybody knows that inflation for individual groups varies but for those whose major spend is on food and heating, e g pensioners, it is way above 3%.

    We have been told to-day that food prices are going to increase considerably in the next year, heating prices are up by 6% + etc

    Good news ? Not in the real world

    Report on 16 October 2012  |  Love thisLove  1 love
  • jimfo
    Love rating 7
    jimfo said

    What a load of balls. The RPI has been fiddled so much its a wonder the strings havn't broken. Low inflation figures mean that our millionair chancellor will give lower rises to pensioners. The lousy economic progress means lower returns on savings and the QE or money printing by the BOE has castrated the annuity rates.

    The rich toffs in downing st are incapable of running a party in a brewery. If they hadn't been born with a silver spoon in their mouths they would be on benefits. Come to think of it they are !!!

    Report on 16 October 2012  |  Love thisLove  1 love
  • Ed Bowsher
    Love rating 79
    Ed Bowsher said

    Hi Timeperly,

    I accept that your typical pensioner faces a higher inflation rate than your average Brit. But I don't accept that the RPI and CPI don't reflect what is 'really happening.' They reflect the average across the whole population and across the whole country.

    Re pension being based on the September rate: Yes, that's a good point. Not such great news. Remember though that thanks to the government's 'triple lock', the increase in inflation will be at least 2.5%.

    Regards,

    Ed

    Report on 16 October 2012  |  Love thisLove  0 loves
  • oldgold
    Love rating 4
    oldgold said

    What's going to be 'good news' about this - not just for me, but for countless thousands of other pensioners?

    The figures are dodgy.

    The cost of living for we oldies is higher than for the younger sections of the population.

    Interest rates on the savings of those of us who, over the decades, have been careful with money will fall - yet again.

    Through the coming winter, unnecessarily increased fuel prices by the uncontrolled energy companies will add a further impost upon pensioners' outgoings.

    In essence, we oldies - who have served this country beyond well - are going to be shafted by yet another couldn't care less government.

    Report on 16 October 2012  |  Love thisLove  1 love
  • Ed Bowsher
    Love rating 79
    Ed Bowsher said

    "QE or money printing by the BOE has castrated the annuity rates."

    I agree that annuity rates are stunningly low at the moment. I feel very sorry for anyone who is planning to buy one in the next few years.

    Where I disagree is the assumption that QE is the sole cause of these super-low rates. There are several other causes, as I wrote here: http://www.lovemoney.com/news/savings-investments-pensions/annuities/16495/annuity-meltdown-will-eventually-end

    In fact, you could make a case that QE has made no difference. If you assume that the economy would be in an even worse mess without QE - which is plausible - and inflation is lower - which is also plausible, then annuity rates could be just as low as they are now without QE.

    That said, arguing about the cause doesn't help people who have recently bought annuities. It's a depressing situation which is going to put people off saving for a pension which is far from good news.

    Ed

    Report on 16 October 2012  |  Love thisLove  0 loves
  • Timperly
    Love rating 5
    Timperly said

    Sorry Ed , your article is headlined - Good News for Pensioners- when it clearly isn't. What would have been a good article is if you had said why it could be good news for some but not for others

    Report on 16 October 2012  |  Love thisLove  2 loves
  • Mike10613
    Love rating 600
    Mike10613 said

    The energy companies cut prices and inflation drops. The energy companies put prices up and inflation goes up. No surprises there then.

    Some pensioners will benefit not from a fall in inflation, but from a discount on energy bills this winter; that will help pay for the rise in prices.

    Good news for pensioners will be when we have grown ups running the country rather than public schoolboys.

    Report on 16 October 2012  |  Love thisLove  0 loves
  • Dampflok
    Love rating 22
    Dampflok said

    So my pension goes up by 2.2% and my electricity bills by 14%; what's good about that. I would say that the only good news here is that we got 5p off the petrol tax but the suppliers soon made sure that their price went up by 5p so the only people who gain are the suppliers. No, there is no good news. CM

    Report on 16 October 2012  |  Love thisLove  1 love
  • JOHN MAXWELL
    Love rating 56
    JOHN MAXWELL said

    don't forget state pensions rise by a minimum of 2.5%, not great news but a little bit better. what will happen to pension credit? last year because of a high state pension increase some pension credit was actually reduced. the real point for pensioners however is that when you go pay your bills it is likely the things you really need, food and energy, will be a lot higher than 2.5 % increase.

    Report on 16 October 2012  |  Love thisLove  1 love
  • nickpike
    Love rating 270
    nickpike said

    This is nonsense. The food price increases and package size reductions is getting frightening.

    Report on 16 October 2012  |  Love thisLove  1 love
  • nickpike
    Love rating 270
    nickpike said

    Just got brain into gear. Lower inflation = good news = now the robbing incompetents at the BoE can print more money (QE) in November to give to the banks and provide more money for the government to waste on all those who are 'entitled' to it.

    Report on 17 October 2012  |  Love thisLove  0 loves
  • Arblaster
    Love rating 41
    Arblaster said

    The RPI has been fiddled so much its a wonder the strings havn't broken.

    I like it.

    Journalists are already spouting the CPI when they used to spout the RPI instead. The presstitutes in the media are already touting the government line.

    We already have some woman from the people who massage these government statistics saying that the CPI is too high, and needs to be jerrymandered further so as to bring the rate of what they call "inflation" down further.

    We have also had no less a man than American Nobel Laureate Paul Krugman addressing the House of Lords. As if the Bearded Blunder has not driven the US economy into the ground with the cockamamy inflationary theories that spew from his mouth like molten lava.Now he wants to do likewise to the UK economy. Why do people listen to him? He is incompetent. He is the a la mode economist, AND HE DIDN'T SEE THE CRASH OF 2008 COMING! Plenty of people did, including myself. Everything he has predicted is wrong, and they are still listening to him.

    The way things are going, the CPI is going to metamorphose into the American "Core Inflation", where the printing presses are overheating, the prices in the shops soar to the skies, while "Core Inflation" went DOWN.

    I saw something on YouTube a couple of years ago. They chose four economists who got their forecasts wrong. They all had one thing in common: they used government statistics. Then they chose four who were consistently right. Yes, they all ignored government statistics.

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  • Dampflok
    Love rating 22
    Dampflok said

    Nickpike, in the case of my pension, apart from a short period as a student, I have worked since leaving school after A levels and retired at 65. All that time I have paid national insurance in order to buy a pension. It is not a case of " 'entitled' " in inverted commas, I paid less into my company pension but got more out of it than I will ever get from my state pension. When I was working in life assurance many years ago I remember being told that if my employers ran their business like the gov't ran their NI the company would have been out of business with in a couple of years as being a 'bad buy'.

    Bottom line: I paid for my pension and am, therefore, entitled to it. CM.

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  • Ed Bowsher
    Love rating 79
    Ed Bowsher said

    Hi Arblaster,

    I strongly disagree with you about Paul Krugman. Many pundits and economists have been predicting high inflation in the UK and US for the last four years and it hasn't happened. Krugman has consistently said that, in our current economic circumstances, QE wouldn't trigger big rises in inflation, and he's been proved right.

    He's also consistently said that fiscal stimulus was the right medicine for our current economic mess, and he's been proven right on that too. Just look at the UK economy since 2010. We've followed Osborne's austerity strategy and economic growth has been painfully slow.

    Pre-2008, Krugman frequently flagged up the risk of a housing crash in the US, and he was also opposed to Bush's tax cuts.

    (Tax cuts were a dumb idea when the economy was close to full capacity between 2001-7, and just created a massive government debt mountain in the US. Things are different now, a fiscal stimulus is the only way to get growth moving and boost growth, which will eventually reduce the deficit. There's no real danger of inflation because there's lots of spare capacity in the economy.)

    So no, he didn't predict the financial crisis as it turned out, or I haven't seen any such predictions anyway, but he wasn't too far off the mark pre-2008. He correctly highlighted two growing problems which were both causes of our current mess: Bush tax cuts and the US housing bubble.

    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.

    So yes, savers have had a tough time. Lots of people have had a tough time since the crisis. But we haven't seen inflation spike upwards to 10% or more. And that's what many folk were expecting in 2009/10.

    Krugman's commentary is very insightful and mostly correct in my view

    Regards,

    Ed

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  • MK22
    Love rating 142
    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.

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  • Arblaster
    Love rating 41
    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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