Article

INFLATION TO DEFLATION
- April 2009

By Frances Kemp - (KT Financial Services Ltd)

Address: 36 Unthank Road, Norwich, Norfolk, NR2 2RB
Tel: 01603 661156
Fax: 01603 614956
E-mail: frances.kemp@ktfinancial.co.uk
Visit our Web Site: www.ktfinancial.co.uk

Just a few months ago, inflation was the spectre that stalked us all. By September, inflation had soared to 5.2%, fuelled by high prices for food and energy. However, following sharp falls in commodity prices and declining demand for goods and services, inflation no longer appears to be a problem and deflation is the new threat.

Deflation is defined as a persistent and sustained decline in prices. A sustained deflationary spiral can help to exacerbate recession as, although some people might welcome an environment of falling prices – particularly after a period of high inflation – a sustained period of deflation could have very negative consequences for the struggling UK economy.

In a deflationary environment, consumers will delay making purchases, believing that prices for goods and services will continue to fall. This delay makes it harder for companies to sell their products, forcing them to slash prices and leading to lower profits, declining wages and job losses. In turn, the reduction in disposable income further impairs demand for goods and services, creating a sustained and damaging spiral.

We are confident of a recovery - the big question is how long will it take?

Rates reach a new low

In its latest attempt to revive the UK economy, the Bank of England (BoE) has cut UK interest rates to a new low of 0.50%. The cut was widely expected, but it will inflict further pain on Britain’s savers, who are already struggling with exceptionally low rates on their deposit accounts.

The UK is officially in recession. Consumer confidence has continued to evaporate, and inflation is falling fast, all amid speculation that the UK might hit an environment of deflation. Unemployment is rising, and the services sector is in decline. February’s statement from the BoE’s Monetary Policy Committee warned that "The global economy is in the throes of a severe and synchronised downturn", and the International Monetary Fund expects our economy to contract faster than any other industrialised country in 2009.

Some business groups believe that lower rates will not be sufficient to boost activity, and are urging the BoE to intensify pressure on banks to increase their lending activities. They believe lack of credit is ultimately more of a problem than the cost of borrowing. Many hope that the BoE's injection of £50 billion will be nough to speed up the recovery process. With growing speculation that UK interest rates could actually hit zero, and sooner rather than later, the BoE will eventually be forced to look beyond monetary policy as a means of kick-starting the economy.

A Vanishing Market

It wasn’t so very long ago that credit was cheap and easily available, and mortgage lenders were fighting to win business. However, since the credit crunch took hold late in 2007, it has become increasingly difficult and more expensive to borrow.

According to the Bank of England, mortgage approvals for house purchasers declined to just 27,000 in November 2008 (from 32,000 in October) as tighter credit conditions and falling house prices deterred first-time buyers from entering the market. Even remortgages, which had held up as existing borrowers sought new deals, were down in November, perhaps partly because of seasonal effects but also because the latest Bank of England moves made it less important to move away from standard variable rates (see below).

The increased risk of default from borrowers in a depressed economy, coupled with a lack of financing available in credit markets, has spurred mortgage lenders to tighten lending criteria. In an attempt to help out, the Bank of England has now slashed interest rates to just 0.5%, the lowest level ever, and they could fall further. This has also brought down standard variable rates for existing borrowers. Despite this, however, mortgages are still hard to come by - and tracker mortgages in particular have all but disappeared.

The Government may be finding it difficult to make the banks lend money, even with the financial support. However, this is an opportunity for banks to clean up their lending books and they may at least eventually emerge in better shape.

Planning for Care Fees

It is a well known fact that our population is ageing. As life expectancy improves and an increasing number of us survive well into our 80s and 90s, so too does the number of people requiring care on a long term basis. This is something which touches us all, whether directly or through relatives such as ageing parents or grandparents.

With complicated legislation to interpret and a multitude of financial options to consider, it is no wonder that moving into a care home or establishing permanent at home care arrangements can be a very stressful and emotionally draining process. The average cost of residential care in East Anglia is circa £700* per week and only those with very limited capital means (capital under £22,250 for the 2008/2009 tax year) will qualify for financial assistance.

Although some help can be obtained in the form of attendanceallowance, it does not usually provide a complete solution. One option is to explore the advantages of dedicated financial policies that can cover all or part of the cost of care and whilst they are not a universal panacea, they can in the right circumstance provide a core solution.

Many people are not aware of these plans and with the help and advice of a specialist many of the problems of providing funds for care fees can be solved. At KT Financial Services, we have a number of specialist long term care planners qualified to provide accurate, sensitive advice for those either contemplating care, their relatives or those already in care.

This is a hugely topical issue and as experts in providing long term care financial planning, we are delighted to welcome Janet and Jeremy Davies from Symponia (a family company providing specialised support to those offering Care fees planning), as guest speakers at our Long Term care seminar on the 16th June 2009. They will guide us through the maze that is Long Term Care legislation, potential financial solutions and detail what the State actually provides.

If you would like more details regarding this event, please contact Frances Kemp at frances.kemp@ktfinancial.co.uk. If you would like to discuss Long Term Care planning, your own needs or the needs of your relative or client, please contact Hayley Tink, Sue Gamble or Jane Armstrong on 01603 661156.

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