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Falling inflation and deflation – what does it all mean and is it a good thing?

Inflation dropped to zero for the first time on record last month, according to ONS stats.  The stats suggest this is because of price drops on food, as well as cheaper recreational products such as books, toys and games.

This could mean Britain is pushing closer to deflation, where the inflation rate has effectively fallen below zero. But what does this mean for us?

Short term impact of deflation…

In the short term, deflation can be a good thing as it often causes falling prices.  This can be good news at the petrol pumps and at the supermarket – filling up your car costs less than a year ago and supermarkets are cutting costs at the tills. You may also spot energy bills falling.

… But what happens in the long term?

The problem comes once deflation has been sustained over a long period of time.

Deflation can eventually leaded businesses to either cut their prices further, reducing company profits - or undergo a process of job cuts.

If this goes on for a while this could halt economic growth and job creation.

So what should you do about deflation?

In the face of falling prices it can be a good idea to think about your savings or paying off your debts.

If you have loans or owe money on credit cards it usually makes sense to pay off the debt that charges the highest rate of interest first – it’s the fastest way to clear your debts. 

If you don’t have debts, you could consider overpaying your mortgage.

Our research also revealed that seven in ten UK homes spent an average of £1,101 in a year on unexpected costs. Putting aside just £3 a day would mean they’d have £1,095 after a year to cover those extra bills.

What would you do with any extra money?

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