UK inflation rate: What does this mean for YOUR money?

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Inflation is a measure of how much prices of goods and services has changed over time. The rate of inflation is published each month by the Office for National Statistics, and the inflation rate has now dropped to a fiver year low across the UK according to the latest figures.

Inflation is a key measure of financial wellbeing for a country – it basically affects what consumers can buy for their money.

A rise in inflation will mean that your money doesn’t go as far as it once did – if inflation goes up, so does the price of goods.

Inflation has plunged to 0.2 percent in the year to August 2020 compared to 1 percent in the year to July 2020.

The target rate of inflation for this year is set at two percent.

UK core inflation, which excludes energy, food, alcohol and tobacco, slowed to 0.9 percent in August from 1.8 percent in the previous month.

Prices in restaurants and hotels contracted 2.8 percent in August, compared with the same month last year.

What does a drop in inflation mean?

This means prices are now 0.2 percent more now compared to the same time last year, but prices are down in the year to August compared to in the year to July.

Eat Out to Help Out is a significant driver of this – as well as the VAT cut issued by the Chancellor Rishi Sunak earlier this year.

Consumer confidence is down currently due to the coronavirus crisis – people are going out less and spending less – and with people spending half of what they normally would with the EOTHO scheme, this has contributed to a further drop.

The winding up of the furlough scheme has also meant many people, particularly those who are facing the chop from the scheme and almost certain job loss, are contributing significantly less to the economy.

What does this drop mean for me?

In the short term, a stagnant or falling rate of inflation can be a good thing as it – very simply – that means prices won’t go up.

This can be good news at the petrol pumps and at the supermarket – filling up your car costs less than a year ago and supermarkets are cutting costs at the tills – you may also spot energy bills falling.

Eat Out to Help Out is the main driver behind the drop in inflation – but as the coronavirus threat still looms over our economic health, it is likely the dip will be kept in check.

Adrian Lowcock, head of personal investing at investment platform Willis Owen, told Express.co.uk: “The inflation drop in August is mainly driven by the “Eat out to Help out” scheme, and with the country still recovering from lockdown the figures are likely to be subject to revision.

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“While the collapse from July’s figures looks extreme, savers and investors must not fixate on the figures as inflation is likely to be very volatile in the near term, reflecting the disruption caused by the Government’s response to COVID-19.

“Longer term, there is a risk of inflation returning as a result of the UK and other countries’ responses to the crisis.

“Investors and savers should be prepared for that possibility.”

Tom Stevenson, investment director for Personal Investing at Fidelity International added consumer demand is likely to stay down this autumn as we see through the coronavirus crisis.

He said: “Weak demand should ensure that inflationary concerns remain on the back burner for now and price growth will track closer to zero through to the end of the year.

“Rising coronavirus cases, the reintroduction of restrictions, negative wage growth and the prospect of half a million redundancies as the furlough scheme winds down this autumn will all play a part in keeping consumer spending subdued.”

The risk that does run with low inflation is the risk of deflation – when prices decrease over time.

Dr Nikoloas Antypas, lecturer in finance at Henley business School, told Express.co.uk: “During times of deflation, the demand for products is markedly lower than the supply and, therefore, several companies have no economic benefit of maintaining all their employees on payroll.

“Usually, deflation means lost jobs, decrease in economic activity, and economic depression.

“The risk of deflation is much worse than the risk of (mild) inflation, and that’s why governments and central banks aim at avoiding deflation.

“The 0.2 percent inflation rate is dangerously low to zero and, if the demand does not pick up in September, we risk having deflation and all its side-effects.

“This risk can explain the Government’s efforts to increase spending and motivate people to go back to work, which will increase demand for the products and services of food establishments, dry cleaners, fashion sellers etc.

“If the Bank of England does not manage to maintain inflation in positive levels, the current economic depression may be prolonged and even have a worse outlook than the current situation.”



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