Your inflation questions answered - what it means for your money

What a fall in inflation means for your cash
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Inflation measures the change in prices of goods and services in the economy. A drop in inflation means that prices are now rising more slowly.

Combined with wage growth, this makes the cost of living more affordable, because you can buy more with the money in your pocket. This means being able to save more, buy more goods and services, and enjoy a better quality of life.

An economist from the Treasury explains exactly what a fall in inflation means for you.

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How will lower inflation help the economy?

Lower inflation supports people by maintaining the purchasing power of their money. If prices only rise slowly, people can plan their budgets more effectively encouraging spending and investment, which fuels the economy.

Lower inflation also helps businesses grow by providing a stable, predictable environment for them to operate in allowing for more job opportunities or the ability to research new products and services. Finally, low inflation enhances the UK's competitiveness in a global market. When the economy is stable and predictable, other countries are more interested in investing in the UK.

This can bring in more money from foreign investors, give us better trade deals, and make the overall economy stronger.

How will lower inflation help my business?

If inflation is lower, it implies that the cost of materials businesses utilise to produce their goods and services isn't rising rapidly, reducing the need for them to pass on price increases to their customers. Take a coffee shop as an example; they won't be facing significant hikes in the cost of their coffee beans, paper cups, or the energy required to light up the shop.

Since none of these elements are becoming drastically more expensive, there's no need to transfer these costs onto the price of coffee for their customers. Lower inflation offers a sense of stability for businesses, which is crucial in enabling them to make future decisions.

High and fluctuating inflation prevents businesses from planning their future expenditure. For instance, if you're considering investing in a factory that will take a year to construct, it's vital to know the expected costs in a year's time.

What does a decrease in inflation mean for my mortgage?

Inflation indirectly affects mortgage rates through the financial market's expectations for the Bank of England's base interest rate. The base interest rate, also known as the Bank Rate, is the tool utilised by the Bank of England to reduce inflation.

Mortgages are typically priced based on what the financial markets anticipate future interest rates will be. This implies that if markets begin to anticipate higher inflation, they will increase their expectations for the Bank Rate, with the aim of cooling the economy and returning inflation to its target.

This is subsequently reflected in mortgage interest rates. If inflation drops faster than anticipated, it could result in a decrease in market expectations for the base interest rate, and consequently, a reduction in offered mortgage rates.

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