Inflation or deflation?

As you may have read in the newspapers inflation is now at a record low, at near 0.5% and well below the Bank of England’s 2% target. With the oil price fall we might well move into deflation.

What is driving inflation down? Bad deflation is when companies cut back, people lose jobs, demand falls so corporate profits fall, so more people are laid off; then begins a vicious circle. But in this instance, it is predominantly lower fuel prices, stable utility prices and supermarket price wars; this is not so bad for consumers. In fact, at present more people are in work and their living costs are not rising but possibly falling; happy days.

SO no need to worry quite yet.

Back in 2003 we used to use the RPI (Retial Price Index) rather than CPI (Consumer Price Index) that we use now. SO what is the RPI reading now; 1.6%; no deflation to worry about there. Also, looking at core inflation (tripping out fuel and food prices) it sits at 1.3%; again no worries.

It is certainly important to remain watchful of deflation and its effect on interest rates (and the consequent knock on effect of house prices) BUT for now it does not seem like too much to worry about. Most forecasters seem to have pushed back their forecast for the next rate rise to mid 2016.

Who does this scenario benefit then? Those with debt, and seeing the 5 and 10 year fixed mortgage rates on offer it would seem a good opportunity for homebuyers and buytolet investors to lock in some low long term debt by taking out a mortgage or remortgaging. 5 and 10 year fixes at 3%; I doubt we will see these levels again for a good long while!

NB: Of course this carries our normal disclaimer, that these are only our opinions and please seek your own professional advice.

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