Deflation will push real saving returns up while mortgage free pensioners suffer

22 April 2009 / by Rebecca Sargent
A key UK measure of inflation fell into the negative in March for the first time in almost 50 years, new figures from the Office of National Statistics have revealed.

The Retail Prices Index (RPI) measure, which includes mortgages, fell from zero to -0.4 per cent, pushing the economy into deflation. Meanwhile, the Consumer Prices Index (CPI), which does not include mortgages, fell from 3.2 per cent to 2.9 per cent.

The news of RPI deflation has been met with mixed reviews. Some analysts claim that the news will be good for savers, who will experience greater 'real' returns, yet statistics show that mortgage free pensioners will continue to suffer from higher inflation.

Commenting, Kevin Mountford, head of banking at said: "The level of savings – or savings ratio – has been too low for too long in the UK. However, deflation might be the trigger savers need to get them back in the savings habit because their money will be worth more."

However, many claim that older people and pension drawers will continue to suffer higher inflation, despite the official rate - figures from Alliance Trust suggest that inflation for those aged between 65 and 74 is actually 3.7 per cent, while it is 4.6 per cent for those aged 75 or above.

Shona Dobbie, head of the Alliance Trust Research Centre said:

"The elderly continue to be hit hardest by high prices. Gas, electricity and food prices still remain elevated and the need to cover these basic costs leaves elderly households with much less money to spend elsewhere."

Michelle Mitchell, charity director of Help the Aged and Age Concern added:

"Falling headline inflation masks the fact that many older people's real rate of inflation remains far higher than the average.

"Most older people aren't benefitting from falling mortgage interest rates which are driving down inflation and are still struggling with high food and fuel bills."

Mr Mountford added: "Most of those in retirement don't have mortgages so they won't have benefitted from this. Instead, they are seeing their income fall because savings rates have been slashed and they have pensions linked to inflation – yet the cost of many things they buy is till going up."

© Fair Investment Company Ltd