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Cost of living set to tumble
Jonathan Prynn, Consumer Affairs Editor14.10.08
The cost of living is set to be brought down with record cuts in interest rates and a fall in inflation.
Prices rose by 5.2 per cent in the year to September, according to latest official inflation figures, but will grind almost to a halt over the next year, say City economists.
The rate of inflation is set to drop because of the threat of recession and the tumbling price of oil. This will allow the Bank of England to cut base rates from 4.5 per cent to 2.5 per cent, the lowest since 1951, said Jonathan Loynes of forecasters Capital Economics.
By mid-afternoon the FTSE-100 was 16.5 higher at 4273.4 but on Wall Street the Dow fell 55.12 points to 9332.44.
Gordon Brown's growing reputation as a global statesman received another boost when President Bush copied his bank rescue package.
The US version of the “Brown plan” will see $250 billion spent buying shares in eight of America's biggest banks.
The Prime Minister is even being urged by Labour MPs to call a snap election to capitalise on his success in handling the economic crisis.
One former minister told the Evening Standard: “He should not let the chance slip through his fingers if there is a chance of winning — or even just a chance of preventing the Tories from winning outright. This may be his last chance to go for it before the recession takes hold in a big way.”
A looming recession and the falling price of oil means that inflation has almost certainly peaked and could drop to as little as one per cent within a year. That could pave the way for the lowest interest rates in almost 60 years.
The latest forecasts came on another encouraging day for the City following yesterday's historic £37 billion rescue of high street banks Halifax Bank of Scotland, Royal Bank of Scotland and Lloyds TSB. The three-month Libor, the rate at which banks lend to each other, fell from 6.26875 per cent to 6.24875.
The rise in confidence came despite the official measure of inflation, the Consumer Prices Index, hitting its highest level since 1992.
But the City was cheered by the first drop in the rate of food price rises since March. They went up by 12.7 per cent, compared with 14.5 per cent in August. A record global wheat harvest is expected to lead to further sharp falls in food inflation. The increase in the headline inflation rate was driven by huge annual rises in the cost of energy over the past 12 months.
Gas prices were up almost half and electricity by almost a third. But energy is expected to remain steady or come down over the winter and petrol prices are already 15 per cent lower than at their peak.
The signs of falling inflation are already obvious in the battered high street with many chains going straight into autumn sales only weeks after their summer promotions ended.
Most economists expect inflation to return to its target rate of two per cent by next autumn and could go as low as one per cent.
Some even fear that Britain is heading for a period of falling prices, or deflation, giving the Bank of England the excuse to cut the base rate to levels not seen since 1951 when Sir Winston Churchill was Prime Minister.
Jonathan Loynes, chief European economist at Capital Economics, said: “We expect interest rates to drop to 2.5 per cent or less.”
For the third of borrowers on tracker rates that would mean another £120 off monthly repayments on a typical London mortgage of £200,000.
It would also inevitably feed through to the fixed rates on offer in the market. The three “state-owned” banks have already pledged to maintain the flow of competitive lending to first-time buyers as part of the bail-out deal.
Stephen Robertson, director general of the British Retail Consortium, said: “The good news is these figures show we have passed the peak of food inflation… retailers are rushing to pass on the benefits of slowing inflation for produce at the farm gate and falls in world costs, such as oil and wheat.”
Reader views (20)
Dream on!
- Fraser, Telford Park
These fools will say anything. Inflation at the present is over 20%.
- Frederick, London, UK
Pigs might fly.
Once again our economists clearly have no idea about what they are talking about. Do they not understand that there are now 6 billion mouths on the planet to feed, that energy demand is on the up, especially now that China is returning to her polluting ways.
The theory that inflation is going to drop is merely put out in the hope that it will force the Bank of England (BofE) to cut rates.
To members of the BofE I say, hold off for a while until you see definite signs that inflation is coming down. I think those economist borught up in the 'Alan Greenspan, easy money era' are in for a rude awakening. (Also, when money supply increases, what generally happens to inflation?)
- Ian G-B, London, UK
How about we abandon Usury like Aristotle did in Ancient Greek Democracies? The Usurers were banished to the edge of town (cue bankers).
Profit and Loss according to natural & divine legislature with no middleman in between who controls the flow of money, hence makes the rules up himself (The Usurer).
- Astab Hussain, Sheffield UK
With a couple of noughts. Alistair is back in town.
- Sue Palmer, plymouth devon
Oooh yes, bring on the interest rate cuts! - I'm on a discounted tracker! If base rate hits 2.50% then the property boom will start all over again. I know, as an independent financial adviser, property prices started booming when base rate was 3.50% - I remember it very clearly...there was a scramble to buy, refinance and buy some more! As for those who think prices will fall by 50% - Yes, if you own a new build flat, no if you own a house. The only thing here is the boom will happen in 5 yrs time and will last another 10 yrs, as the sure as the seasons, the cycle of rises and falls will always continue.
- Mortgage Broker N3, London, England
These statistics do not suggest the cost of living will fall, just that it will rise more slowly. Wow, cost of living rising more slowly than 5%, I'm ever so grateful Mr Saviour Brown.
- Matt, Herts
Cost of living set to tumble...
I'll believe it when I see it!
- Edd..., Great Bardfield, UK
Pigs refuelled and ready to taxi. Yes go for an early election. I'm sure there will be a few votes in it from all the hundreds of thousands that will lose their jobs, from all those that will have their pensions and savings ruined, from all the house holders that will see their values plummet by another 25% and from all those that have lost the 10p tax band. Yes please go for a snap election. Are the Govt really that stupid to believe that we dont know who is really responsible for the biggest bust of all time?
- Clarky, London
If interest rates drop from 4.5% to 2.5% the monthly payment on a tracker mortgage will drop by £330 not by £120 as stated in the article. An extra £330 a month would likely increase people's spending and strenghten the economy.
- Adam, London
Madelsons back. Spin is back but we are not so stupid this time inflation at 5.2% Any other time the government would be getting slaged off for this butno.Golden Brown has us all under his spell I dont think so,
- Dave Smith, Croydon
If Brown solely caused our problems then why is just about every country in the world having to copy the same kind of bankinng bailout. Presumably he didn't bankrupt Iceland? Or cause Americans sub prime fueled banking collapses? etc etc etc.
- Richard, LONDON
Well dropping everything might be great! But no one will borrow, money will be very tight and people much poorer. If this is the end of rip-off Britain it can only be a good thing, but it is only relative as people will not be able to afford much.
- Sheila, London UK
And the blind will see; the deaf will hear; the crippled will walk again, all thanks to Gordo the Saviour! Not!
- Wen, Oxfordshire
Jonathan
This has to be wishful thinking.
Oil prices have fallen for the time being but will be as strong as ever in a couple of years time. Soft commodity prices are strong and there is no reason to suppose that this will change. Recession is likely to kick in soon and last for a couple of years at least. Low interest rates may become a feature but, given the British obsession with propping up artificially high house prices supported by debt, it's easy to see inflation taking hold for the first time in a generation.
Sorry, I don't buy it.
- Simon, London
Cost of living set to fall ? If you believe that you'll believe anything. Will costs of electricity, gas, water, BT phone lines come down ? No. Will the cost of petrol fall by more than a penny or two a litre at the pump ? No. Will rail fares come down ? Interest rates at 2.5% ? I very much doubt it. And even if all this happens will taxes stop going up, particularly Council Tax ? No.
- Peter Haldane, London
Do I detect the hand of Alastair Campbell manipulating the media again? How come these economists can suddenly predict falls in inflation and interest rates when they couldn't predict the downfall of our banking system a week ago?
- Nobby Clark, Perth, Scotland
Hold on, before everyone gets carried away with this Brown euphoria let us not forget who got us into this mess in the first place.
- Albert Swift, Aberdeen, Scotland
Unfortauntely 1% inflation means prices have stabalised at a high level which means lower disposable income and a higher cost of living. The era of cheap everything (mainly from China) is over. We have allowed domestic manufacturing industry to die for the sake of cheap imports for a few years. Our consumer spending dependent economy is flawed now that housing equity is diminished.
- Steve, Essex
Yeah, yeah,yeah, from the same man that gave us NO more BOOM and BUST. Britain is broke financially and morally. Who did it?
- Mike, London
