Deflation on the way, warns Bank of England

Inflation "likely" to drop below 0% in coming months.

Inflation is likely to drop below 0% this year, the Bank of England has said.

In the latest minutes from the meeting of the Monetary Policy Committee (MPC) – the Bank of England committee which decides what should happen with Bank Base Rate each month – members point out it that a period of deflation appears to be on the way.

The minutes state: “Inflation was likely to turn slightly negative briefly at some point in the coming months and to remain low for the rest of the year.”

The MPC has a 2% target for inflation. Any time that inflation is more than 1% away from that target, in either direction, the Governor of the Bank of England is required to write to the Chancellor of the Exchequer to explain why. The minutes note that Mark Carney, current Governor, will probably be required to write further letters over the rest of 2015.

Falling inflation

Back at the start of February, when the Bank of England published its most recent Inflation Report, it admitted that inflation could “temporarily turn negative”. At that point inflation stood at 0.3%.

Since then inflation has dropped to 0% in both February and March, according to the Office for National Statistics, with further falls now looking increasingly likely.

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When will inflation pick up again?

According to the minutes, the members of the MPC are confident that most long-term measures are “broadly consistent” with hitting the 2% target, though there is still a risk that inflation will not be back on target within two years as a result of weak wage growth.

While the members of the MPC were unanimous in voting to keep Base Rate at 0%, two said the decision was “finely balanced”.

Why it matters to your money

Inflation is how we measure the changing cost of living. If inflation is low, it means prices are low and it is much easier to get a real return on your money from a savings account.

That said, the actual return you get will continue to be mediocre until Base Rate rises, which looks a long way off at the moment.

Until rates improve, it's worth looking to the likes of current accounts and, if you're happy to consider a bit more risk, peer-to-peer accounts for better returns.

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