Inflation is falling. What effect could this have on your financial plan?

Rising inflation and the cost of living crisis have dominated headlines in the last few years. As we approach a general election on 4 July 2024, all parties are keen to demonstrate that they are fiscally responsible because the economy and inflation remain major concerns for many voters.

Indeed, in its April 2024 issues index, Ipsos reported that 27% of people listed inflation and rising prices as “important issues facing Britain”.

Fortunately, inflation has fallen in recent months and the Office for National Statistics (ONS) reports that it was 2% in the 12 months to May 2024. This is a significant fall from the high of 11.1% in October 2022.

However, the figures from Ipsos suggest that, although inflation is coming down, many people are still worried about the cost of living.

Additionally, you might be wondering what effect the lower rate of inflation could have on the wider economy and your personal finances.

Read on to learn what falling inflation could mean for your wealth.

The cost of certain goods and services may continue rising while others could fall in price

A key question that many people have is: “Does falling inflation mean that prices will come down?”

Generally, the answer is likely to be no. Inflation is a measure of how much the cost of goods and services has increased. So, falling inflation means that prices are increasing at a slower rate, but they are still going up.

Many economists believe that a low level of inflation is positive because it encourages growth and stops the economy from stagnating. If prices were to fall and inflation dropped below zero – known as “deflation” – this could damage the economy and dampen growth.

That’s why the Bank of England (BoE) currently aims to achieve “disinflation” – the rate of inflation falls but remains positive – and has an inflation target of 2%. The BoE have achieved this target as the ONS reports that inflation fell to 2% in the 12 months to May 2024 and they will try to keep it at this level.

As such, prices will likely continue rising overall, albeit at a slower rate, even though inflation is falling.

However, the cost of specific goods and services varies, with some increasing in price while others become more affordable.

For instance, high inflation was driven, in part, by a spike in energy prices caused by the war in Ukraine. Fortunately, energy prices are stabilising and the “energy price cap” – the maximum amount providers can charge for each unit of energy and the standing charge – is coming down.

According to MoneySavingExpert, Ofgem reduced the energy price cap by 12% on 1 April 2024 and it will fall a further 7% on 1 July 2024. So, you may have already seen your energy bills come down and they could be reduced further in the near future.

Conversely, the cost of food and drink is expected to continue rising throughout 2024 and several services including phone and broadband contracts have recently increased in price. Council Tax and water bills have also risen for people across the country.

As a result, while inflation is coming down and certain expenses may be more affordable, you might still need to prepare for other goods and services going up in price.

Your cash savings may be more likely to grow in real terms

Over the past few years, inflation may have affected the real-terms value of your cash savings. This may happen when the rate of inflation is greater than the interest you generate on your savings.

For example, if you put £1,000 in a savings account with an interest rate of 3% a year ago, you would now have £1,030.

However, if inflation is 5%, the same goods and services that cost £1,000 a year ago now cost you £1,050. As a result, the real-terms spending power of your savings has decreased.

Fortunately, now that inflation is falling, you may be more likely to achieve real-terms growth on your savings. Indeed, according to Moneyfacts, the best easy access savings account interest rate on 31 March 2024 was 5.2%, while inflation was just 2.3%.

That said, inflation could still dampen the growth you see because, although you might have an interest rate of 5.2%, your real-terms interest rate – interest minus inflation – would only be 2.9%.

That’s why you may want to consider alternative ways to grow your wealth, such as investing.

Additionally, if interest rates fall in the future, you might find it more difficult to achieve meaningful growth on your cash savings. A drop in interest rates could be more likely as inflation comes down.

More on this next.

The Bank of England is expected to reduce interest rates in the future

When inflation rose to alarming levels, the BoE responded by increasing its base interest rate 14 consecutive times to where it currently stands at 5.25%. This makes borrowing more expensive, meaning that people have less disposable income left after making debt repayments. Higher interest rates may also encourage people to save more of their disposable income.

Consequently, consumers reduce their spending and companies slow the rate of price rises to remain competitive. In turn, this reduces inflation.

While the policy appears to be working and inflation has come down, high interest rates have caused an increase in mortgage costs for many homeowners. Indeed, in December 2023, MoneyWeek reported that 5 million households were expected to see an increase in mortgage costs by 2026, with the average loan increasing by £240 a month.

High interest rates also make it more difficult for businesses to borrow money, potentially reducing their potential for growth.

Fortunately, on 10 May 2024, the BBC reported that BoE governor Andrew Bailey was “optimistic that things were moving in the right direction” even if the BoE wasn’t yet ready to cut interest rates.

Now that the rate of inflation has fallen to the BoE target of 2%, it appears likely that there could be a cut in August or September.

This could affect you in several ways. First, it may make borrowing cheaper so you might be able to secure a more affordable mortgage and the cost of repaying other debts such as credit cards could fall.

Yet, falling interest rates might also mean that the interest rate on your cash savings account decreases too. As a result, you may find it more difficult to achieve meaningful growth.

It may be worth considering how lower interest rates might affect your financial plan so you’re prepared to adapt to changing circumstances.

However, Andrew Bailey is keen to stress that we can’t tell what the future holds and if inflation doesn’t remain low, interest rates could stay at their current levels for longer or even rise again.

Falling inflation may be positive news, yet inflation and changes to interest rates could still affect your financial plan. That’s why you may want to seek professional advice to ensure that you’re prepared for any developments and are still able to work towards your long-term goals.

Get in touch

We can help you understand and prepare for the effects of inflation on your wealth.

Please contact us at or call 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Get in touch

By talking about your current situation and listening to your aims, we create a personalised plan that will put you on a path to achieving your aspirations.

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