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Deflation: what it means for our money
The UK has hit deflation, with annual inflation as measured by the Consumer Prices Index (CPI) dropping to -0.1% in May, down from 0% in April.
It’s the first time the CPI has entered negative territory since records began in 1996 and the first time since 1960, according to comparable historic records.
[UK inflation negative for first time since 1960, seen temporary]
What this means for our money
Deflation means that we have more money in our pockets as prices fall. Of course, it depends on what you spend your money on as to how much wealthier you’ll feel.
The Bank of England has factored a period of deflation into its forecasts, so this means interest rates are unlikely to rise in the short term to combat it. Indeed, some experts believe this is the only month that we’ll see deflation.
There has been much talk about the difference between ‘good deflation’ and ‘bad deflation’. ‘Good deflation’ is defined as putting a bit more money in our pockets in the short term, while ‘bad deflation’ goes on for a longer period of time and leads to economic stagnation.
The expert view is this is a period of ‘good deflation’, and the impact of lower fuel prices and food will disappear in the coming months.
Impact on borrowers
For mortgage borrowers, there’s an interest rate price war going on at the moment which means fixed rates in particular are falling to record lows. So if you’re on the lookout for a mortgage, or you’re nearing the end of a fixed rate period or on a standard variable rate, it’s a very good time to shop around to see if you could get a cheaper deal.
Impact on savers
For savers, while it means all savings accounts beat the cost of living, rates are unlikely to increase in the short term. In fact, the recent trend has been for them to fall again.
If you want to make your savings work harder then it’s worth looking at high-interest current accounts, peer-to-peer lending or even dabbling a toe into the stock market via an ISA.
