UK inflation rate falls to 0.5%

December 2014 saw UK consumer price inflation fall sharply to 0.5%, down from the 1% recorded in November, according to the Office for National Statistics (ONS). Many economists were expecting a rate of around 0.7%.

The inflation rate is the lowest since May 2000 and is the joint lowest on record. The Retail Prices Index (RPI) also fell to 1.6% from 2% in December.

Most of this can be attributed to the big drop in oil prices, and in the year to December motor fuel prices have fallen by 10.5%. Food prices over the same period have also contributed, falling in the year to December by 1.9%. Capital Economics believe a further fall to 0.2% in February could be on the cards and it is likely that inflation will be below 1% for a few months yet.

This further strengthens the case for interest rates to be held at current levels. The positive from this for short-term savers is that whilst returns on cash accounts are low, at least they are not being eroded by inflation in the same way. For the over 65s, there are also the new Pensioner Bonds this month, offering 2.8% gross for 1 year and 4% for 3 years, maximum investment of £10,000 in each.

As it has been for the last few years, one option for longer term investors is to look for better returns from the stock market. For income seekers, equity income funds are also an option. However, it depends on the investor’s attitude to risk, as stock market investments can fall as well as rise.

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