The latest price inflation figures from the Office for National Statistics (ONS) show UK inflation has fallen to 1.2%.
The Consumer Prices Index (CPI) measure of UK price inflation fell to 1.2% for the year to September, from 1.5% the previous month.
This is the lowest rate of UK inflation in five years.
The Retail Prices Index (RPI) measure of UK price inflation also fell in the year to September, from 2.4% to 2.3%.
The ONS say lower energy and food prices contributed to this fall in price inflation, as well as cheaper transport costs.
What the lower price inflation figures mean is interest rates are less likely to rise now until well into 2015. The pound fell in value as a result.
Price inflation figures published in October for the year to September used to be closely scrutinised as they were previously used as the basis for a wide range of state benefits.
However, most benefits are now subject to a 1% capped annual rise, which was introduced in April 2013. If the Conservatives win the next election in May, these same benefits will be frozen for a further two years.
State pension benefits are subject to the ‘triple lock’ of the higher of inflation, earnings growth or 2.5%. With inflation and earnings both lower than 2.5%, this figure will be used instead.
Only disability benefits will rise in line with CPI inflation, so will be uprated by 1.2% next year assuming the government approves this increase.
When constructing and reviewing your Financial Plan, it is very important to make realistic assumptions about future price inflation.
Inflation can drive the long-term outcomes of your Financial Plan and is often underestimated, resulting in a gap between earnings power and needs later in life.
Care fees in particular often rise in cost at a faster pace than the official UK inflation figures published each month by the ONS, so a higher inflation figure should be assumed when considering the cost of care in later life.
