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What is inflation and how do falling rates affect you?

Inflation rates fell to 0.5% in December. The only other time this has happened was in May 2000, and it has never been lower since records began in 1989. But what does this mean and how could this affect you, your savings and the things you pay for?

1. What is inflation?

Inflation is a measure of how much prices are rising. Deflation is the opposite, ie how much prices drop. So an annual inflation rate of 1% means things cost 1% more than they did 12 months ago.

It’s worked out by tracking the prices of hundreds of popular items, from bread to cinema tickets. It’s the average change that becomes the inflation rate, though some items are given more importance than others.

Generally, a higher inflation rate means that you can buy less with your money. A low inflation rate though can be good news for purchasing everyday items.

To understand more about inflation, watch our short video.

2. Is it good news for your supermarket shop?

Supermarket price wars have lowered the cost of many items in your shopping basket –. That has influenced the low inflation rate, so it’s a good sign you are paying less for your groceries. 

There are things you can do to bring down the costs of your supermarket shop further. Planning what you need before you go shopping can be a good way to avoid wasting food. If you can, it doesn’t always pay to be loyal. Many of the supermarket’s own brand items are made by the same manufacturer,  but cost less. 

3. Does it make a difference at the petrol pumps?

With oil prices falling, this has put a downwards pressure on the price of petrol at the pumps, meaning you should be paying less.  

If you’re looking to save money while driving, you should make sure you look after your tyres properly. Reducing the weight you are carrying, such as unnecessary items in your boot, and getting your car serviced regularly could also mean that your fuel is going further.

4. Could it help the cost of your energy bills?

The falling wholesale cost of fuel could also translate into lower energy bills. E.On has become the first Big Six energy supplier to cut prices as a result, announcing a 3.5 per cent reduction in its standard gas tariff. This works out as equivalent to £24 off an average annual household gas bill.

It is worth using a comparison site to see if you can save by switching or fixing your energy supplier. 

5. Is it time to think about your savings?

In theory, because of costs going down you’ll have extra money to spare. This makes it a great time to put money away for emergencies.Our research has 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.

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