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Inflation falls to 3% but pensioners still at a disadvantage

19 February 2009 / by Rachael Stiles
Inflation fell to three per cent in January, which some experts see as a positive move for consumers, but other see it as yet another blow for savers – particularly pensioners – who have already seen the value of their investment fall.

Down from 3.1 per cent in December, but still above its target rate of two per cent, Consumer Price Index inflation is a concern for more than half of the British public, who are worried about the affect it will have on their pension, according to Lincoln Financial Group.

While inflation might be at three per cent for the majority of the population, new figures from Alliance Trust show that pensioners were actually facing inflation rates of 5.4 per cent in January – 80 per cent higher than for the average consumer.

The gap between inflation rates for the older and younger generations remains wide, the Alliance Trust Research Centre has found. Younger generations spend more money on consumer goods such as audio and entertainment equipment, whereas the elderly have been hit by spending the biggest proportion of their incomes on essentials such as food and energy bills which have been pushed up significantly by inflation.

People who are under the age of 30 and those in the 30-49 bracket are facing inflation rates lower than the official rate of three per cent, the research found, and they continue to benefit the most from the recent retail discounting and the reduction in VAT.

"Although we saw a small decline in the headline rate of inflation this month, we are concerned that inflation facing the older age groups remains high." said Shona Dobbie, head of the Alliance Trust Research Centre.

The elderly are not seeing the same benefits of falling prices as the young" and "continue to be hit hardest, even now that inflation is in retreat."

"The current gap between the inflation rates facing the young and elderly remains wide and is of great concern at a time when older people who rely on income from savings may also be suffering from the effects of falling interest rates." Ms Dobbie said.

But Simon O'Connor, head of products and marketing at Lincoln Financial Group, believes that the fall in inflation will come as a "welcome relief" to pensioners and is hopeful that the benefits of falling inflation rates will trickle down to pensioners soon.

"With recent decreases in inflation, which will hopefully have an impact on the pensioners' inflation rate which is still well above the headline level, pensioners will hopefully feel they are able to stretch their retirement funds a little further as the cost of living decreases." he said.

"Unfortunately not all household expenses are decreasing, so it is extremely important that people budget and plan for their retirement especially with retirement funds suffering in the current market."

Mervyn King said at the Inflation Report press conference last week that "with the full range of instruments at its disposal, the Monetary Policy Committee can and will take action to return inflation to the target and so ensure that economic growth will again match its potential."

© Fair Investment Company Ltd