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Inflation falls to four-year low in March

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15/04/2014
The UK's headline inflation rate fell to 1.6% in March, from 1.7% in February, according to the Office for National Statistics (ONS).

This is the third consecutive month inflation – as measured by the Consumer Prices Index (CPI) – has undershot the Bank of England’s 2% target, and marks the lowest level since October 2009.

The largest contribution to the fall in the rate came from transport, particularly motor fuels.

Other smaller downward effects came from the clothing and furniture & household goods sectors.

These were partially offset by upward contributions from restaurants & hotels and alcohol & tobacco.

Ben Brettell, economics editor at Hargreaves Lansdown, said: “Today’s figures confirm the complete absence of pressure on the Bank of England to raise interest rates.

“The Bank of England is now targeting the UK’s ‘output gap’ rather than unemployment. The Office for Budget Responsibility forecast this won’t close until 2018 – combined with continuing low inflation this gives Mark Carney plenty of leeway to keep rates low, and I don’t expect them to rise until mid-2015 at the very earliest.”

The effect on savers and investors

Brettell added that today’s figures were a “mixed blessing for savers”.

“Inflation is eroding their capital more slowly than previously, but lower inflation also lessens the chances of deposit rates improving. The increase in Cash ISA allowance to £5,940 and then to a potential £15,000 in July should provide a little respite,” he said.

However, he said lower inflation should be good news for stock market investors.

“Although equities are normally considered the asset class best-equipped to deal with higher inflation, the transition between low and high inflation can be painful for stock markets. A continuation of low interest rates should also be supportive for equities.

“Falling inflation is also positive for bond investors. Much has been made of the risk that higher interest rates and inflation could cause a sell-off in bonds. Lower rates for longer could postpone this.”

 

 

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