Line chart of Annual % change on consumer price index showing UK inflation has slowed

What does the chart show?
UK inflation has fallen to 0.8 per cent, its lowest level since August 2016, the Office for National Statistics said. The drop in inflation, or disinflation, from 1.5 per cent in March to below 1 per cent in April is the result of collapsing commodity prices, reduced spending and increased saving by cautious workers preparing for a long, slow recovery.

Wait a second. What’s the difference between disinflation and deflation?
Deflation refers to a decline of prices when the supply of currency falls and money becomes more valuable. Disinflation, on the other hand, is a slowing of the pace of inflation. Falling inflation indicates a contraction in an economy. Prices continue to rise, but the purchasing power of money erodes less rapidly.

What does this mean for my money?
It has been difficult for savers to find inflation-beating savings accounts for some time, as interest rates have stayed low. But falling inflation means that interest rates on savings accounts are more competitive. With inflation falling to 0.9 per cent in April, savings accounts with a 1 per cent interest rate are, suddenly, beating it. However, savers should not assume the trend will persist.

“These low inflation figures are a false signal for savers,” said Kevin Brown, a savings specialist at investment provider Scottish Friendly. Savers now have better rates of return relative to inflation, he said, but this may only be temporary.

He added: “This could quite conceivably lead to a spike in inflation as many households with pent up cash are unleashed on the high street.” 

Many savers still keep their cash in “easy access” accounts that offer very low interest rates, meaning their money will lose value over time. “For savers trying to beat inflation, the fact it has fallen back so far means that what was once a stretch, is now a walk in the park,” says Sarah Coles, personal finance analyst at investment platform Hargreaves Lansdown. “Unfortunately, far too many people will still fall short.”

Ms Coles recommends that savers with more than 3 to 6 months of expenses saved should consider moving the remainder of their savings to interest-earning accounts.

As banks and building societies have cut interest rates on savings accounts, investors should look to lock in a competitive rate before further cuts are made. The highest available rate on a 5-year fixed rate savings account is just 1.85 per cent, down from 2 per cent one month ago, according to Moneyfacts.

“We haven’t seen the last of the easy access cuts, so they won’t stay above inflation forever,” Ms Coles said.

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It is uncertain whether the UK will see rapid inflation in future or continued disinflation. Adrian Lowcock, head of personal investing at Willis Owen, said: “The solution for investors, then, is to prepare for both.”

Stocks are well positioned to keep pace with inflation, though a company’s ability to pass its rising costs on to consumers varies by industry.

Investors looking to hedge against inflation are also looking to haven investments, such as gold, said Tom Stevenson, investment director at Fidelity. “Investors have started to prepare for a more inflationary environment by adding to their holdings of gold,” he said. “The precious metal is trading close to a seven-year high.”

What could happen next?
Pressure is likely to build on politicians to reconsider the “triple lock” on increases to the state pension, said Steven Cameron, the pensions director at Aegon.

Not only is inflation falling but earnings growth has slowed since mid-2019. “There is a question over whether the government will see it as both fair and affordable to guarantee state pension increases of at least 2.5 per cent a year,” Mr Cameron said.

The Bank of England could also choose to lower interest rates into negative territory, following the lead of Sweden, Japan and the eurozone. Negative interest rates encourage spending, since they erode the value of savings. “Downward pressure on inflation . . . gives the Bank of England a clear rationale to move interest rates into negative territory to combat upward pressure on real interest rates,” said Melissa Davies, chief economist at Redburn.

A surge in inflation is not out of the question, economists say, as the supply of money has grown steadily since 2008 — but they note that inflation also stayed low in the wake of the financial crisis.

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