Inflation stays at zero in March: what it means for savers, spenders and investors

14th April 2015


Consumer price inflation remained at zero in March, confounding speculation that the UK might enter deflation for the first time since 1960.

Lower utilities, clothing and transport costs kept the consumer prices index flat, Office for National Statistics data reveals.

Ben Brettell, senior economist, Hargreaves Lansdown, says: “The rate was lifted by a month-on-month rise in motor fuel prices (petrol was up 3.8p per litre between February and March). If fuel prices continue to rebound this could mean outright deflation is avoided – though the rate is likely to hover around zero for the next few months.

“Falling inflation has largely been driven by falling fuel and food costs, and this should be positive for the economy. When the price of essential goods and services falls, it acts like a tax cut, boosting disposable incomes and allowing consumers to spend on other items. Mark Carney has described the impact of cheaper oil prices as ‘unambiguously good’ for the economy.”

So-called “core” inflation, which excludes volatile food and energy prices, fell to a nine-year low of 1%, undershooting economists’ forecasts of 1.2%,Brettell explains. The trend for core inflation has been downwards, indicating that underlying inflationary pressure in the economy remains weak. He believes that the headline inflation rate is almost certain to rebound once the effect of lower fuel and food prices falls out of the year-on-year calculations, but weak core inflation should mean the Bank of England is able to leave interest rates on hold for some time yet. ” I can’t see them rising before mid-2016,” he says.

Brettell adds: “Thereafter the process of raising rates is likely to be gradual, with the Bank mindful of high household debt levels (including mortgages) and the potential impact of a stronger pound. The interest rate swap market currently suggests interest rates will average less than 1.25% over the next five years, and less than 1.65% over the next ten years.”

What it means for the pound

Andy Scott, associate director of FX advisory services at foreign currency specialists, HiFX, says: “Sterling fell to session lows against the dollar and the euro following today’s CPI data, which showed prices fell last month, albeit by just 0.01%from a year previous

“It  [means] that we’re unlikely to see an interest rate hike anytime soon which is why sterling weakened slightly. It is currently towards its lowest level against the dollar in five years due in part to expectations that the U.S. Central Bank will hike rates in June or September which has strengthened the dollar. However, against the euro it is towards its highest level in over seven years due to the stronger UK economy and the European Central Bank’s quantitative easing programme that has caused the value of the euro to plummet.”

What it means for  consumer spending power and the economy

Andy Scott says: “A zero rate of inflation means that although wage growth has failed to pick up as quickly as would normally be expected with the economy growing and unemployment falling, it is positive in real terms. Average earnings are due to be released alongside employment figures on Friday and are expected to continue to show subdued annual growth with unemployment down to its lowest level prior to the financial crisis.

“We don’t envisage a situation where the UK faces a downwards spiral of prices that would require a response from the BoE, as has been happening in the euro zone. At the moment, the lower prices are on everyday essentials such as fuel and food means that consumers can choose where they buy it from, but are unable to hold off waiting for prices to drop.

“Providing zero inflation doesn’t feed through into wage demands, then it leaves households with more monthly disposable income that recently they appear to be spending, supporting economic growth.”

Maike Currie, associate investment director at Fidelity Personal Investing, says:  “Britain has been hovering in the parking bay of ‘deflation station’ for some time now. Today’s figure will help abate concerns that the country has fallen into a 1930s-style deflationary spiral, however, it is important to recognise the drivers behind this persistent fall in prices: a plummet in our grocery prices as a result of the ongoing discount battle between supermarkets, the staggering collapse in the oil price and a stabilisation in our utility bills.

“Food, fuel and energy are all essential items to the consumer. No-one is going to delay their purchases of any of these in anticipation of future prices falls. After all, you need to eat, keep warm and get to work. The effect of these factors are therefore likely to be relatively short-lived – the past month already witnessed a slight uptick in petrol prices.”

What it means for investors

 Maike Currie says: “It is important for investors to distinguish between unhealthy deflation, a self-perpetuating spiral of falling prices and disinflation, a slowdown in the rate of inflation. Don’t confuse the two. Disinflation is good news – it lines the pockets of consumers and boosts the economy. Deflation is dangerous because it causes companies and consumers to do the exact thing that causes more deflation – delay spending in the hope of further price falls in future. A 0.7% rise in month-on-month retail sales volumes in February, reported by the British Retail Consortium (BRC), demonstrates that consumers aren’t delaying spending in anticipation of further price falls.

“While politicians will be hoping the boost to our spending power creates a feel-good factor ahead of next month’s  general election, savers will continue to draw the shortest straw. Those who have left their savings lingering in cash will still need to contend with paltry returns. Fidelity Personal Investing calculates that if a saver had invested £15,000 into the FTSE All Share Index over the 10 year period from 31st March 2005 to 31st March 2015, they would now be left with £31,633.02. If, however, they had invested £15,000 into the average UK savings account over the same period, they would be left with £16,298.49. That’s a significant difference of £15,334.53.”

Kevin Doran, chief investment officer at Brown Shipley, has a stark warning for fixed income investors. He  says: “Today’s figures don’t tell the whole story and shouldn’t be taken at face value. I for one can see an abundance of inflation in asset prices, with a real threat of potential bubbles now emerging – overvalued UK gilts being just one example in my view. Until the models used to measure inflation are able to capture real world inflation and asset price inflation, the figures produced each month will continue to mask the truth.

“Furthermore, because of low inflation the Bank of England is also likely to keep interest rates low for the foreseeable future. The challenge for every investor is to not only assess when rates will rise, but the pace at which they will rise thereafter.

“Additionally, in a world in which the yields on fixed income markets represent, in my view, perhaps one of the greatest misallocations of capital in the history of man, the combination of negative real yields and naïve inflation projections make it an asset class to avoid.”

What it means for savers

Rachel Springall, finance expert at says that today all 874 savings accounts on the market beat inflation, and out of these 681 (149 no notice, 79 notice, 243 fixed rate bonds and 210 ISAs) are without restrictive criteria.  The effect of inflation on savings means that £10,000 invested five years ago, allowing for average interest and tax at 20%, would have the spending power of just £8,813 today – a fall of 11.87%.

She says: “With inflation at its current level there will be no desire for the Bank of England to raise interest rates any time soon, so it is likely that savers will need to wait it out for at least another year.

“The low rate of inflation means that it is the everyday consumer who will find their cash going further than before, which will make a big difference to those who carefully budget their day-to-day spending. Savings rates, on the other hand, are still at appalling lows, and with many people’s money languishing in poor accounts it’s never been more important to shop around for a better deal.

“A staggering 146 savings accounts on the market pay 0.5% or less, but consumers can easily get over twice this amount on a best buy easy access account.ISAs remain a great way to save, especially now that the tax-free allowance has increased to £15,240. However, these accounts have not escaped unscathed from persistent rate cuts. Two years ago the average ISA paid 1.82%; this fell to 1.64% last year and has now hit 1.48%.

“Low returns will hit those reliant on monthly interest to supplement their income hard, and a general lack of saving incentives could mean that consumers decide to spend their cash instead.”

What it means for pensioners

Vince Smith Hughes, pensions expert at Prudential, says“Typically, pensioners face higher price increases than most households because they spend more of their money on essential items. However, these costs have now fallen, and the State Pension rose 2.5% last week, meaning the majority of pensioners will be significantly better off.”

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