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In February, the Consumer Prices Index inflation dropped to 3.4%, as reported by the Office For National Statistics (ONS). This is a decrease from January’s rate of 4% and marks the lowest level since September 2021.
Consequently, the inflation level is closer to the Bank of England’s 2% goal, right before they make their decision about interest rates on Thursday.
According to Grant Fitzner, the head economist at the Office for National Statistics, the decline in prices was primarily caused by a decrease in food prices. This year, food prices have remained relatively stable compared to the significant increase seen last year, and there has also been a slowdown in the rise of prices at restaurants and cafes.
What does the decrease in inflation signify for your finances? Industry professionals provide all the information you need to be aware of.
What is inflation?
Rajan Lakhani, a finance specialist at the smart money application Plum, states that inflation is a measure of the speed at which prices for goods and services in the UK are increasing.
“The ONS looks at price changes over the previous 12 months to calculate inflation. [But] the key thing to remember with inflation is when inflation is falling, like today’s announcement, that doesn’t mean prices have fallen. It just means on average prices are rising less quickly,” Lakhani said.
For instance, the Office for National Statistics (ONS) would compare the prices of goods in February 2023 to those in February 2024.
is up
The inflation rate in the UK has increased.
Mortgages
According to Rob Morgan, head investment analyst at Charles Stanley, inflation does not have a direct effect on mortgages and other types of loans.
Morgan stated that the Bank of England’s base rate, which has an impact on many products, is influenced by expectations.
In recent times, lenders have been slightly raising their rates following diminished chances of an earlier wave of interest rate reductions. The latest numerical data does not significantly impact these expectations, as they are already factored into existing market rates. However, if inflation continues to decrease and interest rate cuts are implemented as projected later this year, borrowing expenses may decrease slightly. This decrease will be minimal compared to the significant increase seen since early 2022.
Lakhani stated: “A decrease in interest rates would be positive for individuals with mortgages, regardless if it’s a variable or tracker mortgage, or if they need to refinance this year.”
“Higher mortgage rates, which are influenced by the base rate expectations, have been hitting mortgage holders hard. The quoted monthly interest rate on a 2-year fixed mortgage loan to value (LTV) 75% was 1.64% in January 2022.
“The interest rate for the same mortgage product has risen to 4.73%, two years later. In the case of a £200,000 mortgage for a period of 25 years, this translates to an additional payment of £325 per month (£1,138 compared to £813), signaling a significant rise.”
Savings and interest rates
According to Lakhani, an interest rate is the extra money you receive when you deposit funds into a savings account at a bank, app, or building society.
According to Lakhani, it is crucial to take maximum advantage of savings during times of high interest rates. There are various places that provide a true rate of return, meaning a return that exceeds the inflation rate. For instance, Plum has recently introduced a Cash ISA with a very competitive rate of 5.15%, significantly higher than the inflation rate.
Morgan stated, “Seize the opportunity while it lasts. The most favorable offers for long-term cash rates have already passed as the market anticipates a decrease in Bank of England rates in 2024. As the year continues, cash is likely to lose its appeal compared to assets like bonds and stocks.”
Pay growth
Edible items, beverages, and smoking products
The most recent inflation data is the most affordable since September 2021. At first glance, this is positive news for consumers throughout the nation.
The rate of inflation for common goods and services.
Lakhani stated that the main factor causing the slowdown is a decrease in food, drink, and hospitality prices. Other factors such as decreased pressure on supply chains and lower energy prices have also played a role in this slowdown.
However, the overall rise in costs of essentials such as energy and food in the last year and a half has significantly impacted individuals’ ability to withstand financial challenges. As a result, many have already depleted their savings and are facing the reality of limited funds, while prices continue to gradually increase.
“Significantly, the underlying rate of inflation, which excludes volatile products such as food, energy, alcohol, and tobacco, is also decreasing, along with inflation in the services sector. This provides the Bank of England with more assurance in reducing the base rate.”
Business
The decline in inflation would also impact business owners.
According to Angus Milledge, the leader of new business sales at SAP Concur, the current economic downturn poses a challenge for businesses. Although technically classified as a mild recession, aggregating the total revenue of UK businesses reveals a decrease, while their expenses have risen by 3.4%. This translates to lower net profits unless proactive measures are taken to manage costs.
According to our data, businesses experienced a 24% rise in expenses in 23/24 compared to 2019 due to inflation. Therefore, the recent announcement may be misleading since both consumers and businesses will continue to face higher costs.
Pension
According to finance expert Dr. George Hulene of Coventry University, the recent announcement of an 8.5% increase in state pensions is great news for retirees due to the pension triple lock system. This increase, coupled with a decrease in prices, will likely alleviate some of the financial burden associated with cost of living expenses.
“Additionally, it should be noted that the average household’s energy expense is expected to decrease by £238 from April to June, in contrast to the months of January to March. This is certainly positive news.”
Source: independent.co.uk
