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Pros and Cons of negative inflation…

Enable’s IFAs in Bishop’s Stortford are always having conversations about understanding the effects of inflation. Talking about negative inflation, it is not such good news if you are a borrower, for example if your fixed monthly repayment is £500 and in an era of negative inflation, when your wages might even go down, this could mean your £500 becomes a larger proportion of your salary, so paying it off becomes harder. When inflation is high the opposite is true, as your salary rises, your borrowing becomes a smaller proportion of your spending, making it more manageable to pay it back. Governments with large deficits experience the same thing so some inflation has to be a good thing.

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Deflation can also affect interest rates as the longer that inflation is below the Bank of England’s target the longer it will be before a rise in interest rates can occur. But the longer we have zero or negative inflation, the more likely it is that the next move in interest rates could be down, rather than up.  Mark Carney is convinced that negative inflation is unlikely to last and has said that the CPI should pick up “notably” towards the end of the year. As a result of that, experts are now predicting that interest rates will rise in the summer of 2016.

One thing to be clear about however is that negative inflation does not mean negative returns on index-linked savings certificates. The return on Index-linked national savings certificates is based on the Retail Prices Index (RPI) measure of inflation, not CPI. Even if RPI became negative, the return on index-linked certificates would not fall below zero. Similarly, pensions linked to inflation are unlikely to be affected.

Issued by: Enable Independent Financial Life Planners 
25c North Street, Bishops Stortford, Herts CM23 2LD
Telephone: 01279 755950 – Fax: 01279 657339
 Enable Independent Financial Life Planners is a trading style of Enable Independent Limited is authorised and regulated by the Financial Conduct Authority.
It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact us.

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