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Falling inflation – what does it mean for you?

11 June 2024

The following notes are reproduced from a Treasury statement issued 21 May 2024. Lower inflation supports people by maintaining the purchasing power of their money.

These notes come from a Treasury statement issued on 21 May 2024 regarding lower inflation.

Lower inflation helps maintain people’s purchasing power. Slow price rises enable effective budget planning. This, in turn, encourages spending and investment, fuelling the economy.

Lower inflation also aids business growth by providing a stable operational environment. This stability allows for job creation and new product research.

It also enhances the UK’s global competitiveness. A stable economy is attractive to foreign investors. Foreign investment can boost capital inflow, leading to better trade deals and a stronger economy.

 

How does lower inflation benefit your business?

When inflation is low, the prices of materials used by businesses to produce goods and services don’t rise as quickly. This reduces the pressure to pass price increases onto customers.

Take a coffee shop as an example. It won’t face significant increases in the cost of coffee beans, paper cups, or energy for lighting. As these costs aren’t drastically increasing, the shop doesn’t need to increase the price of coffee for customers.

Decreased inflation brings stability for businesses, which is crucial for future planning. High and volatile inflation makes it difficult for businesses to plan future spending.

For instance, if you plan to build a factory in a year, knowing the future costs is essential.

 

What does an inflation decrease mean for your mortgage?

Inflation indirectly influences mortgage rates through the financial market’s expectations for the Bank of England’s base interest rate. This base interest rate, also known as the Bank Rate, is a tool the Bank of England uses to reduce inflation.

Mortgages are priced based on what the financial markets expect future interest rates to be. If markets anticipate higher inflation, they will increase their expectations for the Bank Rate to cool the economy and bring inflation back to target. This expectation is reflected in mortgage interest rates.

If inflation falls more quickly than expected, it may lead to reductions in market expectations for the base interest rate, and therefore, lower mortgage rates.

Source: Other Tue, 11 Jun 2024 00:00:00 +0100


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