Is It Time To Pop The Champagne? What Inflation Falling To 3.9 Per Cent Means For Your Money

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Inflation has fallen further than expected to 3.9 per cent, figures released by the Office for National Statistics.  It is down from 4.6 per cent in October and is the lowest rate for two years. Core inflation, which does not include more volatile prices such as food and energy, fell to 5.1 per cent, down from 5.7 per cent in October.  Money and Business reporter Callum Mason explain what this means for your money.  Music is by Nver Avetyan licensed via Pixabay Check out the rest of their music here: https://pixabay.com/users/royaltyfreemusic-29393722/

Transcript

00:00 Inflation has fallen from 4.6 to 3.9% which is a far more dramatic fall than a lot of economists

00:06 expected. I'm Callum Mason, i's Money and Business Reporter and I'm going to explain why that's

00:11 important to you. Inflation was 3.9% in the year to November which means that in that period that's

00:18 how much goods went up by in terms of price. This is important because as inflation goes up it means

00:24 that you get less for your money. If you have a pound and inflation is 10% over a year then you

00:29 need £1.10 a year later to have the same value. This is why high inflation is bad for an economy

00:36 because people's spending power is reduced. Earlier this year inflation was very very high

00:41 and it was in double digits 11% and 10% and it's come down dramatically since then. But the target

00:47 for the Bank of England is to have inflation at 2% and the 3.9% figure that we have now is still

00:52 nearly double this rate. So while on paper the fall is a good thing there's still progress to be made

00:58 and also it doesn't mean that prices are falling it just means that they're increasing at a slower

01:02 rate than they were doing before. The Bank of England tends to up interest rates when inflation

01:10 gets high and the logic behind this is that interest rates determine how much it costs to

01:14 borrow and if interest rates go higher and it's more expensive to borrow people tend to spend less

01:19 money and the aim is that this means that prices go down or at least stay the same and don't

01:24 increase as dramatically as they would have done. Now that inflation is starting to fall there's

01:28 been some speculation that interest rates might start to come down. They've gone up consecutively

01:33 for nearly two years and have been held at their current level for three meetings.

01:37 If interest rates do start to drop this can be good news for mortgage holders

01:42 because mortgage lenders tend to use these interest rates when they decide how much they

01:46 will charge for lending. So this means that if you're taking a mortgage out next year and interest

01:51 rates fall then your mortgage may be less expensive. But for savers when interest rates go down it can

01:57 mean that you get less returns on your money because the interest rate offered by the bank is

02:01 less. This might mean that if you're a saver with some money to put away you might want to think

02:05 about doing it now while rates are still high. Inflation falling also means that if you get a

02:10 pay rise then your money can actually be gaining in value in real terms whereas before unless you

02:15 were getting a pay rise of 10 or 11 your money was actually losing value. Despite inflation falling

02:21 and there being speculation that interest rates will go down some economists have urged caution

02:26 and said that historically inflation is still actually quite high. We need to get it to two

02:31 percent to be at the target level and this may take a while perhaps next year or the year after.

02:36 So while the figure is good news for the money in your pocket we need to keep watching inflation

02:40 over the next year and hope that it continues to come down. And if you're a mortgage holder it

02:45 might not be time to pop open the champagne just yet.

02:48 [Music]

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