The UK’s rate of inflation fell from 1.7% for February 2020, down to today’s announcement of 1.5% for March 2020. Inflation affects the cost of everything from milk and bread to houses and train tickets. This guide will explain what the changes mean for you and your finances.
Inflation is a rise in the cost of goods and services. When it goes up, it means money does not go as far.
The Office for National Statistics (ONS) regularly publishes a percentage of how much the cost of products have increased over a given period.
For example, if the rate of inflation on a pint of milk is 2% in a year, then a bottle that cost 50p in January 2019 would set you back 51p in January 2020.
This all means that if wage rises fail to keep up with inflation, consumers are able to buy less.
The ONS produces three main figures on the rate of inflation. These are the:
Retail Prices Index (RPI)
Consumer Prices Index (CPI)
Consumer Prices Index including owner-occupiers' housing costs (CPIH)
The RPI is considered by many to be out of touch with modern consumer practices and is generally significantly higher than the CPI.
The CPI is the most commonly referenced rate of inflation. It is calculated using the assumption that you will buy a product less often if its price goes up and more often if its price goes down.
The ONS considers the CPIH to be the most comprehensive measure as it expands the CPI calculation to include the costs of living in your own home.
Most economists believe the current rate of inflation decrease is a consequence of the coronavirus crisis, as the prices of many products and services are unable to rise significantly while demand is so low during lockdown.
Yes and no. Most countries aim for an inflation rate of around 2-2.5% in order to encourage consumers to buy and businesses to increase wages. As of March 2020 the UK is well below that point, so considered to have a low rate of inflation.
If inflation gets too high, i.e. anything over 3% or 4%, it can lead to consumers struggling to afford basic necessities as everyday products increase in price.
If inflation is too low, wages can stagnate and purchasing power goes down.
The perfect balance would see both wages going up and consumers able to purchase essentials at an affordable price. Though too fast a rise can cause economic shock and fears of hyperinflation — when the prices of goods and services get out of control.
The Bank of England target is currently set to 2%, so a fall from 1.7% to 1.5% suggests the rate of inflation is going in the wrong direction.
Many annual price increases are tied to inflation, such as train season tickets. This means that retailers cannot raise the price beyond inflation plus a fixed figure.
It is important to remember that the ONS figure is an average rate based on specific products. The impact on your household will depend on what services you use and what financial products you have.
Inflation lowers the value of each unit of a currency. If you owe money, the value of what you owe goes down (though not the numerical value). However if you have cash saved, its value will also decrease.
For example, if you have a fixed-rate mortgage, inflation means the value of your debt is going down. You are therefore paying less money in real terms.
You can look for the best mortgage deals here.
However, if you have savings or you are trying to build a pension, inflation means the money you have stocked up is decreasing in value. That is unless your savings interest outstrips inflation.
Inflation also affects businesses, so you could find your wages or bonus are impacted. A sharp jump in inflation can lead to businesses cutting back on investing, or having to pay staff more to help them cope with rising consumer costs.
We have a handy guide on how to manage on a reduced salary during the coronavirus crisis.