House prices: down. Inflation: up. Wage growth: static…. What’s next?

Written by Rebecca O'Connor on 16th May 2017

Inflation has risen from 2.3 per cent to 2.7 per cent. House prices have fallen month-on-month by 0.6 per cent, according to official figures, and wages – well they are growing at 2 per cent – better than nothing, but not enough to keep up with the rising cost of living.

It all paints a picture of a bit more struggle for regular households on limited incomes, ie. most of us. And we probably don’t need to remind you that most of this has been caused by Brexit and the effect of the weak £.

But how these macro figures really affect us depends on our current priorities and whether we are more a saver or a borrower right now. Crudely, those who are on balance, borrowing more are protected by ultra low interest rates, while those who are saving are suffering from higher inflation and low rates. Homeowners may see the value of their house dip; while renters may be spotting opportunities to get on the ladder, thanks to price falls in some areas.

What can you do? In short: spend less, save more and look for places to save or invest that beat inflation. If you have a mortgage, check in case you could get a cheaper deal.

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On house prices:

Jonathan Hopper, managing director of Garrington Property Finders, said: “These official figures suggest the slowdown is sharper and started earlier than first thought.

“April’s surprise election announcement applied a dab to the property market’s brakes, but this data confirms it had already dropped down a gear in March.

“While the speed and severity of the fall in annual price growth – down to its lowest level for more than three years – will alarm some sellers, such national averages mask the wildly different conditions at opposite ends of the market.

“Properties in some regions continue to see double-digit price reductions, while at certain price points in the most in-demand areas, gazumping is back with a vengeance.

“Nevertheless the broader trend is undeniable. East Anglia’s gravity defying, double-digit rates of price inflation are a thing of the past and it has been forced to share its ‘fastest growing region’ crown with the East Midlands.

“Even London finds itself in a position it is unaccustomed to – close to the bottom of the pile.

“The chronic shortage of supply is still propping up prices in many areas and mitigating the slowdown. But this snapshot of a slowing market – taken before the election announcement – confirms what many in the industry had feared. For the housing market, the snap election has come at just the wrong time – injecting an unwelcome dose of uncertainty into an already fragile market.

“Nevertheless the lull could be short-lived. If the election delivers a clear result that puts Brexit firmly back on track, the property market could receive a huge boost, freeing up more supply and with greater levels of clarity spurring discretionary buyers into action.”

On savings for working people:

Calum Bennie, Scottish Friendly’s savings specialist, said: “With inflation now at 2.7% but wage growth forecast to be 2.0% for the year as a whole, even Diane Abbott can work out that household finances are set to be squeezed for a considerable time to come.  Although putting money aside for the future is difficult during periods of constraint, it’s something we should strive to do in case the Bank of England does decide to raise interest rates in future to combat inflation.”

Richard Theo, CEO of Wealthify, said: “It’s high-time savers woke up and smelled the coffee – cash savings accounts are no longer adequate for generating good long-term growth and people need to consider alternative ways to grow their money. Inflation is now the highest it has been since 2013 and steady rises since Brexit last June show no signs of slowing down anytime soon.

At today’s inflation rate of 2.7%, and with average cash savings returns at around 0.37%, inflation is now effectively taking £130* from the average cash saver’s pocket every year, in real terms and yet most are none the wiser. With 63 million cash savings accounts held in the UK today, it amounts to a silent savings crisis unravelling across the country.”

On savings for retired people:

Vince Smith Hughes, retirement expert at Prudential, said: “Rising inflation will worry the millions of retired people in the UK who live on a fixed income.

“Prudential’s research shows that growing inflation is the biggest concern of retired people and many fear that they will outlive their retirement savings.

“Ensuring their retirement funds last the rest of their life becomes more difficult for pensioners if prices rise significantly and they will have to think again about how much income they take from their pension funds.

“The problem is often made worse because pensioners tend to spend more of their income on heating, food and petrol, which means they often face higher inflation than other groups. They also have a larger proportion of their savings in cash, which is producing very low returns.”

On mortgages:

David Hollingworth, mortgage expert at L&C Mortgages, said:

“The upside for those feeling the impact of higher inflation in their pocket, is that interest rates remain at rock bottom and mortgage rates are at or near the lowest on record. Borrowers should be making sure that they are taking advantage of these rates and keeping their mortgage costs to a minimum. All too many don’t review their mortgage and our recent research found that not only were 36% sat on a high standard variable rate, but more than half have never even tried to remortgage.

“In a period of uncertainty for consumers, they can at least use the very competitive mortgage rates on offer to cut costs and also put some certainty into their biggest single monthly outlay by fixing their rate.  That should at least help deal with the inevitable squeeze on disposable income that higher inflation brings.”