What does the fall in inflation actually mean for your household spending?

The Prime Minister has said his plan to halve inflation before the year ends has been “delivered” as UK inflation dropped to the lowest level in two years last month.

According to data from the Office for National Statistics (ONS), the Consumer Prices Index inflation was 4.6% in October, down from 6.7% in September.

This came after energy prices increased last year.

For the typical household, energy bills were capped at £2,500 last year, but this year, industry regulator Ofgem has capped bills at £1,834 for the typical household as prices have fallen.

The reduction in inflation was also driven by house prices, which saw the lowest consumer price index (CPI) rate since records began in 1950.

So how does this all affect us?

What is inflation?

“Inflation is the measure of how fast the prices of things are increasing. This could include the services we pay for and the goods we pay for, including eating out and when we go grocery shopping,” said Rajan Lakhani, a money expert at smart money app Plum.

“In simple terms, it means prices haven’t risen as fast [but] they have still gone up by 4.6%. In some cases though, prices do decrease. For example, energy prices last October were much higher than this year. But in general inflation is still showing that the price of things are still rising at a reduced rate.”

There is a lot of attention on inflation because we are paying more for goods and services, which means our money doesn’t go as far as it usually would in previous years.

Ayesha Ofori, founder and CEO of Propelle, female focused investment platform added: “People assume that when inflation falls the prices of things will fall too, but that’s not the case. There is so much nuance. It doesn’t mean things will necessary get better, so you have to be mindful of lending and spending on credit cards and budgeting, as inflation can still go up. So don’t expect to see an immediate impact in your life.”

How does inflation affect household spending?

“If you are on a tracker mortgage or standard variable mortgage, there can be some positive impact,” said Lakhani.

“It may be good news today, but over the last two years the cost of energy is up 50% and food prices are up too by almost a third, more than the average increase in earnings. It’s still a challenging environment for households.

“This may be a sting in the tail for low income families. The impact is on a cycle. This is why rent is at a record level high because there is a demand as more people aren’t able to buy a property on their own. Landlords have to increase their rates because of this.”

And we shouldn’t assume that when inflation falls the prices of things will fall too.

What can households do? 

It’s all about making your money work for you.

“If you can afford to put money aside, do that too. You should be putting your money to work. It shouldn’t be sitting idle, that’s why it’s also a great time to invest too,” said Ofori.

“Typically, you get higher returns on investment accounts in comparison to savings accounts. But when there is a cost of living crisis, I understand that people just want to hoard and sit on their money but they have to think long term. People shouldn’t only focus on the here and now. You get that compound interest when you invest. Take care of your today.”

One of our biggest spends each week is our grocery shop, so managing this as much as possible is important.

“Try and research different supermarkets, offers, look into the best value and non-value brands. Look at where you do shop,” said Lakhani. “Sometimes doing it online can be useful. You’ve got that record of how much you are spending and it updates in real time. When you go into the store you are caught by those two for one offers that you didn’t plan to buy.

“Set yourself a budget, ultimately. Use an app where you can see where and how you are spending on particular things. If you are spending too much, you can then reduce

Mortgages is another big spend. Lakhani said: “Don’t wait for the last minute to re-mortgage, start at least six months before it expires. Sometimes you can lock in an offer with a supplier too, which gives you some peace of mind.”