
The UK inflation rate just hit a record five-year low of 0.2% – and yes, this is good news. Here’s what inflation means, and how it affects you.
The tax-free ISA deadline is approaching!
If you’ve not made the most of this year’s ISA allowance of £20,000 you have until midnight on 5th April before the allowance resets.
A stocks and shares ISA could be a great tax-free way of investing for the future. To help you make a good choice, MyWalletHero’s experts have reviewed and ranked some of the UK’s top stocks and shares ISAs – compare them now.
Keep in mind that tax rules can change, and the value of any benefits depends on your personal circumstances.
What is inflation?
At its most basic level, inflation is all about price increases. In other words, if the prices of goods and services go up, there’s inflation. When prices drop, we call it deflation instead.
So how is it measured? Well, the Office for National Statistics produces a few estimates, but the one we’re most familiar with is the Consumer Price Index (CPI).
The CPI is based on the prices of thousands of goods consumers normally buy, from fuel to bread.
- The goods we spend the most money on have the biggest impact on the CPI. So, food like bread has more of an impact on the CPI than something like Christmas cards.
- Since the CPI reflects consumer behaviour, it’s a good estimate of the country’s overall economic health.
- In July, we saw the sharpest rise in consumer prices since March, partially because so many products were unavailable during the three-month lockdown period.
So, at the moment, the UK’s CPI is 0.2%. But what does this figure actually mean, and how does it affect your day-to-day finances? Let’s take a look.
What does the UK’s inflation rate mean?
The short answer? 0.2% is a very low inflation rate.
In fact, it’s significantly less than the UK target inflation rate of around 2%. And in July, the UK inflation rate was 1%, so it’s a noticeable drop. The UK government’s ‘Eat Out to Help Out’ Scheme is partly responsible for the drop, because although people ventured out to pubs and restaurants again, they spent less money overall.
But why is there such a thing as a ‘target’ inflation rate, anyway? Because a little inflation is a good thing.
- Inflation (in small doses) stimulates the economy because it encourages people to spend rather than save.
- It can also help increase wages.
On the other hand, there’s such a thing as too much inflation. A rapid rise in inflation slashes the value of your money, and you won’t see any returns on your savings. The cost of living goes up, people stop buying things, and it can lead to a recession.
Ultimately, every economy needs a little inflation, but it’s a balancing act.
Invest up to £20,000 tax free – before 6th April
Would-be investors could make a big tax saving by taking advantage of the annual ISA allowance before it resets. A stocks and shares ISA allows tax-free investments of up to £20,000 each year.
If you’re looking to learn more, MyWalletHero’s experts have reviewed and ranked some of the UK’s top ISA providers.
Keep in mind that tax rules can change, and the value of any benefits depends on your personal circumstances.
1. Spending
In the short term, prices for day-to-day goods probably won’t change much. This is good news because this makes it easier to budget and plan your spending.
The prices for some commodities like fuel are a little less predictable. They could drop sharply if we see another lockdown, but they could rise just as quickly. On the whole, though, it’s cheaper to buy fuel right now than pre-Covid-19.
2. Borrowing
Looking for a mortgage or a personal loan right now? You’ll benefit from low interest rates. Here’s why.
Banks and other lenders use the Bank of England base rate to set their own interest rates. Right now, the base rate is only 0.1% – a record low – so it may be cheaper to get a loan right now.
Just make sure you don’t take out more than you can afford. It’s a volatile time, and interest rates could change dramatically without much warning.
3. Saving
It’s not a great time to build a nest egg or take out a savings account. You’re earning less on your money because of the Bank of England’s low base rate, unfortunately.
This doesn’t mean you shouldn’t save money, though. It just means your money isn’t going as far.
Takeaway
The reality? Don’t obsess over the current UK inflation rate. These are unprecedented times, and the inflation rate will fluctuate in the coming months.
In other words, don’t be put off opening a savings account or looking for a mortgage. Just keep an eye on weekly spending and pay down your debts where possible.
Join our mailing list
If you’re looking for more ways to make your money work for you, why not sign up for MyWalletHero’s email newsletter? You’ll receive our team’s top money-saving tips, lifestyle hacks and handy personal finance ‘must-knows’ – delivered straight to your inbox…
Just enter your email address below to sign up now:
Some offers on MyWalletHero are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.