Benefits of a fall in inflation

An economist from the Treasury explains exactly what a fall in inflation means for you.

How will lower inflation help the economy?  

Lower inflation supports people by maintaining the purchasing power of their money.  

If prices only rise slowly, people can plan their budgets more effectively – encouraging spending and investment, which fuels the economy.  

Lower inflation also helps businesses grow by providing a stable, predictable environment for them to operate in – allowing for more job opportunities or the ability to research new products and services. 

Finally, low inflation enhances the UK’s competitiveness in a global market. When the economy is stable and predictable, other countries are more interested in investing in the UK.  

This can bring in more money from foreign investors, give us better trade deals, and make the overall economy stronger. 

How will lower inflation help my business?  

If inflation is lower, it means the price of materials businesses use to produce their goods and services aren’t rising as quickly, so there is less pressure on them to pass price increases onto their customers. 

For example, a coffee shop won’t face large increases in the cost of their coffee beans, paper cups, or the energy to turn on the lights in the coffee shop.  

Because none of those things are getting drastically more expensive, they don’t have to pass those costs on to coffee for their customers.

Lower inflation provides a sense of stability for businesses, which is important to empower them to make decisions about their future. 

If inflation is high and volatile, businesses aren’t able to plan for their future spending decisions.  

For example, if you want to invest in a factory that will take a year to build, it’s important to know how much things will cost in a year’s time.  

What does inflation going down mean for my mortgage?  

Inflation influences mortgage rates indirectly, through financial market’s expectations for the Bank of England’s base interest rate.  

The base interest rate, which is also known as the Bank Rate, is the tool used by the Bank of England to bring inflation down. 

Mortgages are generally priced to reflect what the financial markets expect future interest rates to be. 

This means that if markets start to expect higher inflation, they will raise their expectations for the Bank Rate, in order to cool the economy and bring inflation back to target. This is in turn 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 reductions in mortgage rates offered.