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Inflation not expected to reach 2% target for two years

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  • 05/11/2015
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Inflation not expected to reach 2% target for two years
The Monetary Policy Committee expects inflation to take around two years to rise from its current position of -0.1% to meet the Bank’s target of 2%.

In its inflation report, the Bank said due to falls in oil and other commodity prices it was likely inflation, measured by the Consumer Price Index, would remain lower than previously expected until late 2017.

After a period of minor fluctuations in the summer around the 0% mark, inflation fell into negative territory in September.

James Jones, head of consumer affairs at Experian, said inflation tended to erode the value of mortgage debt while wages and salaries rose in line to match it, making mortgage payments feel more manageable. But in a negative inflation environment the effects would be reversed. Jones said headline interest rates, the rates quoted in loan and deposit agreements, tend to fall, making borrowing more attractive, but the value of debt no longer sees that ‘chipping away’ effect.

In a deflationary economy, where a sustained fall in inflation is witnessed, wages and salaries are more likely to stagnate or fall rather than rise.

“For those taking out a mortgage, it is important that people work out what they can afford and plan ahead for unforeseen costs that may make repaying debts harder over the years ahead, future-proofing their finances and ensuring they come out the other end with their credit rating intact,” said Jones.

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