Britain is now deeply in deflationary territory.


Britain is now deeply in deflationary territory. Inflation has registered its steepest decline since statisticians began compiling the figures in 1948. The broad measure of inflation, known as RPI, slumped by 1.6pc on an annual basis.

Telegraph UK. July 14, 2009.

Deflation: winners and losers.

Few of us have experience of what it is like to live through deflation. Some will find themselves better off; others will not be so lucky.

WINNERS

STATE PENSIONERS

Pensioners saw their state pension rise by 5pc in April. For a single pensioner the weekly pension rose from £90.70 to £95.25; for couples it went up from £145.05 to £152.30. This is because the annual increase in the state pension is based on the previous September’s inflation figures, and at that time prices were rising steeply.

On the face of it these headline figures suggest pensioners will have more money in their pockets at the end of each month. But many will not be as well off as they suggest. The reason is that the “real” cost of living for pensioners bears little relation to the national retail price index.

For example, many pensioners have not benefited from lower interest rates, which have significantly reduced mortgage costs for many younger families. Most people aged over 65 do not have heavy mortgage costs to pay each month.

Likewise, people in this age group do not spend a significant proportion of income on electronic equipment or high street fashions, both of which are falling in price and have helped to drive the retail price index down to zero.

Conversely, they spend more of their income on food and fuel, both of which have risen in the past year.

So pensioners who spend more on potatoes than iPods are losing out. This means the increase in the state pension will largely be swallowed up by higher costs – leaving pensioners little better off than they were before.

Gordon Lishman, the director general of Age Concern, said: “Falling headline inflation will do little to help older people’s finances. The real rate of inflation for many pensioners remains far higher than the rest of the population.

“In addition, any income they relied on from savings has been hit, leaving many more people just above the breadline.”

SAVERS

Although savers have been battered by low interest rates, deflation means that their money will not be depreciating in value the entire time it is in the bank.

RAIL TRAVELLERS

Regulated rail fares, which account for more than half of all rail tickets sold, are pegged to RPI. They are not allowed to rise at more than 1pc above inflation. If RPI continues to fall, this could lead to a cut in rail fares.

But travellers will have to wait until July’s RPI figures to see whether rocketing rail fares will fall. Next year’s fares are pegged to July’s RPI. There are fears, however, that any cut to regulated fares will lead to rail companies simply increasing the prices of unregulated fares to compensate.

LOSERS

PENSIONERS WITH PRIVATE PENSIONS AND INFLATION-LINKED ANNUITIES

Although the state pension is rising, the inflation figures will put the brakes on any rise in company or private pension income.

Laith Khalaf, a pensions analyst at Hargreaves Lansdown, said: “Those who are in receipt of a pension from their company’s final pension scheme are unlikely to see any rise at present. Most companies will not reduce the income to pensioners if we do fall into a period of deflation.

“But then again the income will not rise, meaning that many face a rising cost of living without a concomitant rise in their pension income.”

During a period of deflation investors who have taken out inflation-linked annuities could see the income they receive each month reduced. Mr Khalaf added: “Annuities from Prudential and Standard Life could fall, while those from Norwich Union and L&G will not decrease but then will not rise until RPI has reached its previous level.”

However, he pointed out that anyone who has bought a standard annuity would not be affected by any fall in inflation.

BORROWERS

Home owners with mortgages have become accustomed to seeing their debts all but cancelled out by inflation over time. However, under deflation the debts effectively get bigger, without salary increases that would help to pay them off.

“The mortgage debt just gets bigger, while wages fall,” said Mark Dampier of Hargreaves Lansdown. The only silver lining is that a deflationary spiral would be likely to lead to continued low interest rates, meaning mortgages are cheaper to service.

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