Inflation rate now 1%

Today, the ONS revealed that the inflation rate has fallen to 1.00%. On the one hand this appears to be good news – prices are not rising rapidly so we dont have to spend quite as much paying for goods and services. On the other hand there are some negative issues with this too. Firstly, whatever any Government says, inflation effectively devalues and reduces debt in real terms, so a degree of inflation for any economy carrying huge national debts (like ours) is actually rather a helpful tool. Secondly low inflation means that Government doesn’t have to worry too much about price rises and attempting to offset this with tempting offers not to spend (i.e. increasing interest rates which encourages saving rather than spending). So low inflation would suggest further long-term low rates of interest, which will displease anyone with cash in the bank using it to provide income.

The main causes of the reduction in CPI (Consumer Price Index) are described by ONS as falls in transport costs (fuel, air transport and second hand cars). A little delving into the data reveals that food and non-alcoholic beverages decreased by 1.7%, clothing by -0.2%, transport by -0.2% and thet delightful category “miscellaneous” decreased  by -0.8%, all essentially deflation. However costs rose 4.0% for alcoholic beverages, 3.3% for electricity, water and gas, 2.0% for health, 2.4% for restaurants and hotels. Education costs rose 10%… which I assume consists in part of University costs. So your personal rate of inflation will rather depend on what you spend your money on. If you wish to delve more deeply into statistics, here is the official excel spreadsheet link.

Personally, I would be less inclinded to reply on national statisitics for your personal financial planning. It is not that I don’t trust the figures, it is simply that they include many things that you may not buy regularly. The weighting of the “basket” of goods and services is defined by others and when planning your own finances, it is much more sensible to consider how relevant it is that education costs, new or second hand cars are as part of your normal budget…. perhaps not much, so peak at the tables may provide clues to your own personal CPI.

Dominic Thomas