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Sitting at it's lowest point since records began, inflation in the UK now sits at 0 percent. In the short trem this could be good news for most of us - we feel richer and, technically we are. But we are also teetering on falling into deflation, which wouldn't be good. John French of Mortagge Advice Bureau at Farrell Heyworth Estate Agents, explains why.

With inflation announced as zero, interest rates are likely to be set lower for longer and there is, of course, the possibility that the record low base rate could also fall even closer to zero.


Why?

The low interest rates will encourage people to continue borrowing money, helping the economy to grow and inflation to increase.

But why has inflation suddenly dropped?

Inflation is affected by a number of contributors, ranging from household goods to video games to transport.
However, with the prices of oil rising slightly from their lowest in six years in February, the prices of fuel didn’t really affect the rate of inflation in the UK.
That particular trait fell to the ever-increasing strength of the sterling against the euro, thus reducing the cost of imports.

It all sounds good. How could it go wrong?

If these low prices continue for too long, we could find ourselves in deflation.
If this was to happen, we could become accustomed to tumbling prices, meaning we wouldn’t spend as much, as we hope that the item we were going to buy today will be even cheaper tomorrow. This could create a ‘chain reaction’ effect as the economy would then become motionless and we could be facing another recession before we know it. 

When will that happen?

With oil prices continuing to pick up, we still have a slight cushion against deflation at the moment. For now, average wages are growing by just under 2 per cent per year, and with the Consumer Price Index (CPI) showing that prices haven’t risen at all, you will find that your wages will go further.
The rate rise is also likely to be delayed as the Monetary Policy Committee (MPC) will no doubt want to see how much zero inflation affects wages.

With the delay in the rate rise, now could be a good time to consider your next steps, be it looking for your first home, remortgaging on your current property or adding to your portfolio. Whatever the case, professional advice should always be taken from an independent mortgage adviser.

For further information call into your local Farrell Heyworth office, freephone 0800 389 1666 or visit www.mortgageadvicebureau.com/farrellheyworth.

Your home may be repossessed if you do not keep up repayments on your mortgage.
There will be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1.5%, but a typical fee is 0.3% of the amount borrowed.

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