UK inflation is falling faster than expected, as the March figure for the Consumer Price Index (CPI) was 2.5%. Could we have seen the peak in inflation?
The March figure which was published in mid-April surprised forecasters who had predicted annual inflation would remain at 2.7% – as it was in February. That February figure was in itself a surprise, given that the forecasts had predicted 2.8%.
The drop for March may well be the result of one-off factors and so should be treated with caution.
One of the issues here is the way in which individual categories can distort the final inflation figure. For example, in March, alcoholic drinks and tobacco saw the sharpest ‘drop price’ – from 5.8% to 3.5%. These ‘inflation basket’ items both saw two sets of tax increases in 2017 – because of the double Budgets – whereas in 2018, the Chancellor moved to a Spring Statement and did not change any taxes.
It was the classic one-off.
The answer to that question was provided by the Bank’s Governor himself, with Mark Carney noting that money markets were forecasting two more rate rises over the next three years – a “gently rising path” consistent with inflation reaching the Bank’s target by the end of that period.
In other words, the Bank currently expects base rate to reach the dizzy heights of 1% around early 2020.
Andy Knight, Chartered Financial Planner at Pembroke Financial Services of Shoreham commented “The unexpected inflation drop prompted some debate about whether the Bank of England (BoE) would raise the base rate on 10th May, but we now know that the Monetary Policy Committee (MPC) kept interest rates on hold at 0.5% at that meeting. The MPC voted by a majority of 7 to 2 to keep rates on hold as it sets monetary policy designed to meet the Bank’s price inflation target of 2%. Given that CPI inflation fell to 2.5% in March, the Bank clearly believes that the inflation rates of the most import-intensive components of the CPI appear to have now peaked.”
However, there still remains a significant gap between what can be earned on short term deposits and inflation, whether or not the base rate rises. If CPI is at 2.5% the only way you can get near this return from your cash deposits is to tie your money up for 5 years or more according to the Moneyfacts Group Savers Friend comparison site as at 15th May 2018.
Andy further says “Despite inflation falling, you are steadily losing purchasing power if you are holding more cash than you need on deposit – even before the tax impacts are considered. The responsibility is still on investors to invest to protect the real value of their capital.”
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The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.