Inflation is falling. As inflation decreases, the prevalent narrative of high inflation dominating headlines for the past couple of years is evolving. With the current rate gradually approaching the Bank of England’s target, understanding its implications for your financial situation could prove beneficial. The Bank of England oversees inflation management, striving to maintain it at 2%. The central bank explains keeping inflation stable helps everyone plan for the future.

Throughout 2021, a confluence of multiple factors contributed to a sharp escalation in the inflation rate. It surged to its highest point in 41 years, hitting 11.1% in October 2022. However, in the period spanning 12 months up to November 2023, while it remains above the Bank of England’s target, the inflation rate has receded to 3.9%, according to Office for National Statistics data.

The BoE’s Monetary Policy Committee (MPC) has projected a continued decline in inflation, moving closer to the 2% target throughout 2024. Nonetheless, the MPC does not anticipate reaching this target until the conclusion of 2025.

Declining inflation doesn’t mean the cost of goods and services will fall

Inflation falling might positively impact your long-term financial outlook, but it’s improbable to directly enhance your daily budget.

A decline in inflation doesn’t necessarily indicate a decrease in the prices of goods and services; rather, it signifies that the speed at which these costs are rising is decelerating. Hence, it could be prudent to assess your everyday expenditures. If your income hasn’t risen in tandem with inflation, you might discover that your real disposable income has diminished.

Consider this scenario: Suppose your income stood at £3,000 per month in 2020. Using the Bank of England’s inflation calculator as a reference, to sustain the same standard of living by November 2023, your income would have ideally needed to escalate by over £630 monthly. This increase accounts for the rising cost of living due to inflation over this period.

Falling inflation interest rates could be beneficial if you’re a borrower 

Inflation’s influence on the cost of goods might not correlate directly, but it can impact borrowing expenses. The Bank of England has addressed inflation by elevating its base interest rate. Increased interest rates often lead to reduced spending as both consumers and businesses adopt more conservative financial strategies.

As of December 2023, the Bank of England’s base interest rate stands at 5.25%, a significant contrast to the 0.1% rate observed in November 2021. The Monetary Policy Committee (MPC) anticipates maintaining this rate in the initial half of 2024, gradually decreasing it to 4.25% by 2026.

Hence, if you hold a mortgage, credit card, personal loan, or any other form of borrowing, the anticipated decrease in interest rates in 2024 could potentially translate into financial advantages for you. This reduction may positively impact your budget, offering some individuals a favourable outcome.

Making inflation part of your long-term goals could help keep you on track 

The recent phase of elevated inflation spanning the past two years has underscored the significance of factoring in the escalating cost of living when devising long-term strategies.

Even when inflation aligns with the Bank of England’s targeted rate, the incremental escalation of prices for goods and services can accumulate over time.

Throughout the decade from 2010 to 2020, inflation averaged 2% annually. While this might not appear substantial at first glance, over the course of a decade, it could gradually erode your purchasing capability, particularly if your income remains stagnant.

If you retired back in 2010 with a plan to draw a fixed monthly pension income of £2,000 for your lifetime, you’d likely observe that your funds don’t provide the same purchasing power relatively swiftly.

According to the Bank of England’s inflation calculator, to sustain the equivalent standard of living by 2020, your pension income ideally would have needed to surpass £2,400.

Consider the implications of stable inflation on your income requirements throughout a retirement that could potentially span several decades. Over this extended period, you might also encounter phases of heightened inflation, further diminishing your spending capability.

It’s not just retirement planning that could be affected by inflation falling, but any of your long-term goals. Whether you’re setting aside money to support your children through university or to buy property in the future, inflation may affect your target and the steps you need to take.

Are you considering incorporating inflation into your financial strategy?

Taking into account external factors such as inflation can significantly impact the alignment of your goals within your financial plan. We encourage you to reach out to us for a discussion on devising a long-term financial plan. Such a plan could provide you with assurance and stability, especially during periods of elevated inflation. Contact us to explore how we can assist you in navigating these financial considerations.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. 

Google Rating
5.0
Based on 68 reviews
js_loader