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Lower inflation not beneficial for all

19 April 2018

UK inflation fell to 2.5% in March, marking its lowest rate in a year, according to the Office for National Statistics. However, while generally welcomed, not everyone will benefit, as industry commentators pointed out.  

Inflation fell from 2.7% in February after prices for women’s clothing grew at a slower pace than in 2017.

The data showed that the year-long pay squeeze is also coming to an end, with wages rising by 2.8% in February.

Kate Smith, head of pensions at Aegon, described the lower inflation figures as “good news for consumers”, and said “increased confidence in the power of money” should prompt people to take a long-term view to saving and pensions.

She said: “Those who can afford to do so should be encouraged to save more in to their pension pot. Doing so, will help weather any stormy seas that may lie ahead.

“For pensioners, particularly those on fixed-incomes, a fall in inflation is good news but just like savers they need to make sure their money works hard for them. Over reliance on cash savings for an income means over time they may find that their money doesn’t go as far as it did, as the hidden impact of inflation sets in.

“With interest rates expected to rise this year, savers should diversify where they invest their cash, looking to stocks and shares for potentially greater growth, that may outstrip inflation in the medium to long-term.”

Kevin Doran, chief investment officer at AJ Bell, echoed the sentiments. According to Doran, while the squeeze on UK households may be coming to an end with higher wages, the fact remains that cash held in savings accounts continues to go backwards.

Doran commented: “Inflation of 2.5% still comfortably outstrips the returns available from most cash accounts and so anyone with large amounts of cash savings really needs to think about other forms of investments if they want to preserve the spending power of their money.”

But while households may be pleased to see inflation on the decline, Ian Browne, pensions expert at Old Mutual Wealth, said the lower numbers would have less impact on elderly households. Browne believes the government should consider how it impacts the older population differently and what it means for their pension pots.

He commented: “Worryingly, close to half (45%) of 50-75 year olds are not worried about the impact of inflation on how long their pension pot lasts, according to research from Old Mutual Wealth. When combined with the fact that most people are vastly underestimating how long they will live there is a very real risk people will face poverty in the final years of their life.

“As inflation begins to drop, it is time for the government to consider how inflation impacts the older population differently and what that means for their policies. Previously government have discussed ending the triple lock, which ensures pension incomes go up by inflation, earnings or 2.5%, whichever is higher. The policy appears unsustainably expensive and it is inevitable that government will be examining it, however, any replacement will need to consider how to handle the impact of inflation on the elderly.”

The lower figures have also reignited the debate surrounding interest rates, with the Bank of England forecast to raise rates to 0.75% from 0.5% next month.

Doran added: “The Bank of England will be pleased to see inflation falling back towards its 2% target but with economic data looking generally solid, the Monetary Policy Committee is still going to be thinking very hard about raising interest rates when it next meets in May.  However, even this won’t offer much succour to savers as any rises are likely to be modest and certainly nowhere near enough to cancel out inflation.”

Thomas Wells, manager of the Smith & Williamson Global Inflation Linked Bond Fund, said the data “will raise questions as to why policymakers are so eager to raise rates.”

He commented: “The hawks will probably point to higher average weekly earnings data, and if compared to today’s UK CPI print, supports the case for anticipated positive real UK wage growth over the rest of 2018.

“However, while wage pressures for UK households are finally beginning to ease, we would still question the path of consumption in the UK, given how hard households have been squeezed in recent years. We know that inflation should ease over the course of this year; if consumption also falls or stagnates, the justification for higher rates could begin to erode quite quickly.”

 

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