Inflation falls: good news for pensioners and savers
The economy may be struggling to grow, but at least inflation is falling.
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.
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!