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UK inflation falls faster than expected – what it means for your finances and how to plan ahead

February 15, 2023 by Scott Gallacher

Introduction

Inflation is a key economic indicator that affects every aspect of personal finance, from savings to investment and borrowing. In January, UK inflation fell faster than expected, dropping to 10.1% from 10.5% in the previous month. As financial advisers, we understand the importance of keeping our clients informed about economic trends and how they can affect their finances. In fact, our director Scott Gallacher was recently invited to discuss this topic on BBC Radio Leicester. In this blog post, we will discuss what the fall in inflation means for your finances and how to plan ahead.

What caused the fall in inflation?

The Office for National Statistics (ONS) reported that the main factors driving the decline in inflation were lower inflation for transport, especially airfares, and for restaurant and cafe prices. 

What does the fall in inflation mean for your finances?

For borrowers, the fall in inflation means there may be less pressure for the Bank of England to raise interest rates, which could mean borrowers don’t see rates continue to rise.

For savers, whilst the fall in inflation is to be welcomed, inflation is still high. And high inflation is bad news for savers, as the real value of savings will still fall. For example, even though savers can now earn 4% on their savings, a 10% inflation rate means that the purchasing power of those savings is still being eroded at quite a high speed.

However, there are still ways to earn a positive real return on your savings, such as investing in a range of assets that offer higher potential returns than the inflation rate, including stocks and shares, property, or alternative investments. Of course, these investments come with higher risks, so it is important to consult your financial adviser before making any investment decisions.

For those with existing investments, the fall in inflation is good news. High inflation is generally regarded as being bad for equities. Whilst modest inflation is normally accepted as being good for equities. So, the fall in inflation, with inflation predicted to continue to fall to more modest levels, should be good for investors.

What can you do to plan ahead?

As financial advisers, we recommend that our clients regularly review their financial plans to ensure they are on track to meet their long-term goals. Here are some steps you can take to plan ahead in light of the recent fall in inflation:

  1. Review your mortgage: If you have a mortgage, review your current interest rate and consider whether you could benefit from a switch to a better rate or a remortgage.
  2. Review your savings: If you have savings, review the interest rates and consider whether you could earn a higher rate by switching to a different savings account or investment.
  3. Review your investment portfolio: If you have investments, review your portfolio with your financial adviser to ensure it is well-diversified and aligned with your long-term goals. Consider investing in a range of assets that offer higher returns than the inflation rate, but be aware of the higher risks that come with these investments.

Conclusion

The fall in UK inflation in January was faster than expected, raising some important questions about what this means for personal finance. As financial advisers, we understand the importance of staying informed about economic trends and how they can affect our clients’ finances. By reviewing your mortgage, savings, and investment portfolio, you can plan ahead and take advantage of the opportunities presented by the fall in inflation. Contact us today to schedule a review of your financial plan and ensure that you are on track to meet your long-term goals.