On the go: UK pension schemes will get a small measure of comfort from the current inflation figure, with the consumer price index falling for the third month in a row to 1.8 per cent in January, the lowest level since January 2017.
Figures from the Office for National Statistics show inflation is down from 2.1 per cent the previous month, bringing the 12-month rate finally below the Bank of England’s target of 2 per cent.
“Economists had expected a smaller drop to 1.9 per cent,” says Ben Brettell, senior economist at Hargreaves Lansdown. “Lower energy costs were the main cause, with prices falling between December and January compared with rising prices a year ago.”
He added that financial markets’ reaction was muted, with sterling little changed and the FTSE already up slightly following renewed hopes the US and China might resolve their differences”.
Kate Smith, head of pensions at Aegon, pointed out that “if wage growth continues to outstrip inflation, as we have seen in recent months, then this should help to absorb some of the costs and mitigate budgeting concerns as minimum contributions for auto-enrolment rise from 5 per cent to 8 per cent in April”.
She added: “Looking ahead, the inflation picture will be heavily influenced by the deal that the UK leaves the EU with. In order to maintain inflation at its 2 per cent target, the Bank of England’s Monetary Policy Committee have kept interest rates unchanged at 0.75 per cent referencing Brexit uncertainty and the wider global slowdown.”
Those, including pensioners, expecting an interest rate rise to boost savings, may therefore need to wait until the political and economic landscape has become clearer, according to Smith.
While CPI is the official measure of inflation, the retail price index is still used by many UK pension schemes as the basis for index-linking of members’ benefits.
RPI was also down to 2.5 per cent over the past 12 months to January, according to the ONS, from 2.7 per cent in December.
