What Does Falling Inflation Mean For Your Finances?

Because inflation is slowing and wages are rising, you might think we can all afford to let our hair down a little more during the holiday season.

But, before the champagne corks pop, everyone should be aware that overspending can result in a painful and long-lasting financial hangover. This is especially true considering that alcohol and tobacco prices are more than 10% higher than a year ago.

Official price and pay data published in the last two days show that workers are typically better off in real terms than they were a year ago. To put it another way, wages are rising faster than prices.

But, make no mistake, prices are still rising, rising 4.6% year on year to October. A slower rate than previously, but still more than twice the target level. The bills are still piling up.

As everyone considers holiday spending, primarily on non-essential items, charities warn that millions of people are under even more pressure to pay for necessities than they were a year ago.

Energy prices are falling, but bills are rising

During the winter, household gas and electricity bills are a perfect example of the financial difficulties that families across the country face.

Falling domestic energy prices are a major reason for the lower inflation rate. Nonetheless, the average household—that is, millions of people—will pay more for gas and electricity this winter than they did a year ago.

How is this even possible?

Inflation has slowed to 4.6%, according to the government, and the pledge has been met. You can read more about this here.

The main factor is a reduction in government financial assistance. Almost everyone received a £400 government-funded energy bill discount over the course of six months last winter. That has not happened this year.

So, while the price of each unit of energy is lower, energy bills may be higher in the coming months (rather than the entire year). Prices are expected to rise again in January.

While inflation is falling, the cost of living is still rising, and consumers are paying significantly more for essential services

The majority of people spread the cost out over the year with equal direct debit payments. However, this is not the case for everyone, particularly those who use prepayment metres.

According to new Citizens Advice data, the number of people who have received crisis support, such as food bank referrals or energy top-ups, is higher this year than it was last year at this time.

It also claims that people are coming to it with a broader range of financial issues than just one major issue.

According to Rocio Concha, director of consumer group Which?, “while inflation is falling, the cost of living is still rising, and consumers are paying significantly more for essential services.”

According to the group’s most recent data, 2.1 million households missed essential bill payments in just one month.

Perhaps the most important essentials we have to buy are food and drink, which continue to be one of the most significant contributors to rising prices, rising 10% in the last year. In simple terms, if a bottle of milk costs £1.10 this year versus £1 last year, annual milk inflation is 10%. Food prices have risen by 30% in the last two years.

The big supermarkets claim to be lowering individual item prices, but the average cost of a weekly shop is still significantly higher than it was a year or two ago.

What effect does inflation have on mortgages?

Policymakers will take into account all of these factors, including consumers’ ability to spend, the future direction of inflation, wages, and the overall strength—or lack thereof—of the UK economy. Remember that our domestic economy has grown very slowly over the last 18 months.

Interest rates have the greatest impact on our finances. The Monetary Policy Committee of the Bank of England has set the so-called benchmark rate at 5.25%, the highest level in 15 years.

Borrowing money has become significantly more expensive than people have been used to for more than a decade. It is most noticeable in mortgages, where people are switching to deals that are hundreds of pounds more expensive each month than before. Rents are rapidly rising due to mortgage pressure on landlords.

Economists and the Bank of England liken interest rate setting to the shape of South Africa’s Table Mountain, which has a famous flat top.

After 14 consecutive increases beginning in December 2021, rates have been on hold for the last two months and are expected to remain at their current level for some time.

And, as any mountaineer will tell you, complacency can make the descent even riskier than the ascent.

Can the government claim credit for the drop in inflation?

While this all sounds depressing, there is help available for those who are most vulnerable to financial difficulties.

Hundreds of pounds in cost-of-living payments have aided in the payment of bills. According to the government, these have provided a “significant boost” to the people. However, a committee of MPs recently stated that they were insufficient for many people and had a short-term impact.

All eyes are now on Chancellor Jeremy Hunt, whose Autumn Statement will reveal how much benefits, pensions, and the minimum wage will rise in a week.

According to speculation, he may try to save the government money by increasing benefit payments less than expected.

That would spark a political uproar and increase the need for everyone to examine their income, expenses, and budgets even more closely—and perhaps postpone the big Christmas party for another year.

Key Takeaways

In conclusion, the complexities of the current economic landscape and its implications for individuals are diverse. While the Consumer Price Index (CPI) for October 2022, reported by the Office for National Statistics, indicates a slowdown in inflation, the reality for consumers is still challenging.

Wages may be rising, but the increase in prices of goods and services, including essential items like food and energy, continues to strain household budgets.

As of June 2023, the Bank of England’s interest rate benchmark remains a critical factor, directly impacting mortgage costs and influencing other borrowing rates. The energy price cap, although reflecting lower energy unit prices, doesn’t fully alleviate the financial burden on households. Especially with the absence of last year’s government-funded energy bill discounts. Households using prepayment metres are particularly vulnerable.

In the context of universal credit and other living payments, the focus is on the government’s response. This is especially relevant in light of the upcoming Autumn Statement. Speculation about potential changes in benefits, pensions, and the minimum wage in August 2023 highlights the uncertainty facing consumers. Additionally, information releases and corporate reports will be closely watched for further insights into economic trends.

As prices fell in certain categories, the overall annual inflation rate remains a concern. The article suggests prudent financial management, including efforts to save money, as essential to navigating these uncertain times. The emphasis is on a careful balance between enjoying the holiday season and avoiding financial stress. Underscoring the need for awareness and adaptation in the face of evolving economic conditions.