Inflation set to fall dramatically - what it means for your money

The UK’s inflation figure is set to fall dramatically when official figures are released on Wednesday. This means the price of goods and services is increasing at a slower rate.

In the 12 months up to January, the Consumer Prices Index (CPI) measure of inflation was 4 per cent, but experts expect February’s figure to be far lower.

Capital Economics toldithe rate could fall to around 3.3 per cent, while S&P Global Market Intelligence forecasts a rate of about 3.6 per cent.

Part of the reason for the slowdown in inflation is expected to be a fall in the rate of food price growth compared to February last year.

“The biggest drag may come from a further fall in food price inflation, and then declines in inflation of restaurants, hotels, recreation, culture and personal care items,” explained Paul Dales, chief UK economist at Capital Economics.

Read Next

A fall in core inflation – a measure that does not include food and energy prices because of their volatility – is also expected.

Raj Badiani, of S&P Global Market Intelligence, told i that exactly how much this figure would fall by – from its current rate of 5.1 per cent – was “less clear,” but added: “I would expect a fall of 0.2 percentage points to 4.9 per cent, based on decelerating service price gains.”

Longer term, experts predict that inflation will continue to fall over the coming months.

In its Monetary Policy Report in February, the Bank of England said inflation would hit its 2 per cent target in April, but on current trajectories, would then rise again.

Predictions for inflation can change, though. There have been some fears that the crisis in the Middle East could spark a surge in inflation again, but as of yet, this has not happened.

Here’s what a fall in inflation could mean for you and your money.

What does falling inflation mean for interest rates?

The Bank of England tends to cut interest rates when inflation is lower. High rates are used to try to curb spending and borrowing – with the intention that this will slow price increases.

If inflation were to fall, it would be good news in this regard, but don’t expect the Bank of England to cut rates from their 15-year high of 5.25 per cent when its panel of economists meets on Thursday.

Bank of England governor Andrew Bailey said at the last interest rate-setting meeting: “We need to see more evidence that inflation is set to fall all the way to the 2 per cent target, and stay there, before we can lower interest rates.”

Most forecasters are now predicting the first fall in interest rates later in the year.

The Centre for Economics and Business Research (CEBR) previously told i it was forecasting a rate cut in May, but now says it will probably be June.

What does it mean for mortgages, pensions and savings?

Mortgages

Although mortgages are not directly affected by inflation, many products are affected by the Bank of England’s base rate, which is influenced by inflation.

Fixed mortgages – the most popular type – tend to work on longer term predictions for where the base rate might go in the future.

Recently, lenders have been increasing rates a little, after forecasters put back expectations of when interest rates might be cut.

A fall in inflation alone will probably not be enough to send mortgage rates plummeting – because it is expected already – but a dramatic one could bring forward predictions for when the first rate cut might come, which in all likelihood would then lead to rates coming down.

Savings

High inflation is bad news for savers as it erodes the value of money held in banks and building societies. Therefore, the lower the rate, the better the news for savers.

However, experts believe we are “past the peak” for savings, with all fixed rates now dropping below 6 per cent. This means it is worth taking advantage of the best deals now.

According to Savings Champion, the best easy-access account, where you can access your money freely, pays 5.11 per cent, and is from Monument.

Pensions

Lower inflation will be welcomed by pensioners who have been struggling with the cost of living crisis over the past two years, especially those for whom the state pension makes up a large portion of their income.

They are in line for an 8.5 per cent boost to their state pension in April under the triple-lock mechanism.

If inflation falls, however, it could have negative consequences for annuities – pensions for life. Rates on annuities have gone down in recent months, and this is expected to continue.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Now is a great time for people in the market for an annuity,” adding that as the outlook for annuity rates is hard to predict, people may want to look into buying one sooner rather than later.