Sitting at its lowest point since records began, inflation in the UK now sits at 0%. In the short term, this could be good news for most of us – we feel richer and, technically, we are, but we are also teetering on falling into deflation, which wouldn’t be good at all. Here the UK’s leading independent mortgage broker, Mortgage Advice Bureau, explains why.
“With inflation announced as zero, interest rates are likely to be set lower for longer and there is, of course, the possibility that the record low base rate could also fall even closer to zero. The low interest rates will encourage people to continue borrowing money, helping the economy to grow and inflation to increase,” said Oliver Adair from Mortgage Advice Bureau.
Inflation is affected by a number of factors, ranging from household goods and video games to transport. However, with the prices of oil rising slightly from their lowest in six years in February, the price of fuel didn’t really affect the rate of inflation in the UK. That particular trait fell to the ever-increasing strength of the sterling against the euro, thus reducing the cost of imports.
“If these low prices continue for too long, we could find ourselves in deflation,” explains Oliver. “If this was to happen, we could become accustomed to tumbling prices, meaning we wouldn’t spend as much, as we hope that the item we were going to buy today will be even cheaper tomorrow. This could create a ‘chain reaction’ effect as the economy would then become motionless and we could be facing another recession before we know it.”
With oil prices continuing to pick up, we still have a slight cushion against deflation at the moment. For now, average wages are growing by just under 2% per year, and with the Consumer Price Index (CPI) showing that prices haven’t risen at all, you will find that your wages will go further.
The rate rise is also likely to be delayed as the Monetary Policy Committee (MPC) will no doubt want to see how much zero inflation affects wages.
“With the delay in the rate rise, now could be a good time to consider your next steps, be it looking for your first home, remortgaging on your current property or adding to your portfolio. Whatever the case, professional advice should always be taken from an independent mortgage adviser,” concluded Oliver. Continue reading