Noflation is back in the UK, with the announcement that the official rate of price inflation has fallen once again to zero.
The Consumer Prices Index (CPI) measure of price inflation was 0% for the twelve months to June. It fell from 0.1% in May.
The Retail Price Index (RPI) measure of price inflation, which includes housing costs and mortgage interest payments, was unchanged in June at 1%.
According to the Office for National Statistics (ONS), the main contributors to falling inflation between May and June were lower prices for clothing and food, as well as a a smaller rise in air fares in June than a year ago.
The Bank of England expects price inflation to remain low in the short-term, but it should start picking up again towards the end of this year.
According to the ONS:
“Inflation has continued its pattern of recent months, when prices have been very little changed on the previous year,”
“The headline rate for June has dropped very slightly on May, back to zero, thanks to small downwards effects from movements in clothing and food prices and air fares.”
Core inflation
Another measure of price inflation worth considering is core inflation.
This excludes some of the more volatile items within the inflation basket, such as energy, food, alcohol and tobacco prices.
Core inflation fell to 0.8% in June, down from 0.9% the previous month. It is now at its lowest level since 2001.
Inflation assumptions
When constructing and updating your Financial Plan, it is important to make reasonable assumptions about future price inflation.
Whilst the UK is currently experiencing a period of very low inflation, reaching ‘noflation’ again this month, we are continuing to assume a price inflation figure of 2.5% as a starting point when constructing Financial Plans for our clients.
We assume price inflation at 2.5% for a variety of reasons.
The official inflation figures published by the ONS are average inflation levels, and the inflation experience of individuals tends to be quite different.
Our clients are typically older, often approaching retirement, and research shows that inflation tends to rise as you get older; the typical goods and services consumed in retirement tend to rise in price much faster than the items consumed during your working lifetime.
Because we build Financial Plans for the long-term, we need to make long-term assumptions about price inflation.
This current period of zero and low price inflation is expected to be short-lived, returning towards the government target of 2% in the near future.
By making reasonable assumptions about price inflation, which are slightly higher than the official target levels, we can build a margin of safety into the Financial Plans we create to reduce the chances of our clients running out of money during their lifetimes; the goal of every good Financial Plan.
