Companies expected to raise investment
Shares surge close to record high as inflation gives pay boost to workers
The FTSE 100 rose by 41 points to close at 6,898, just 32 points shy of the all-time high of 6,930 achieved on the last trading day of the last century.
News of record low inflation added to low interest rates, low oil prices and the prospect of sustained growth, has pushed shares higher. Analysts expect the FTSE100 to break through the 7,000 barrier this week.
Millions of workers are expected to benefit from an effective pay rise following the unprecedented fall in inflation. More people are now better off as average wage rises are higher than inflation which slumped last month to 0.3% from 0.5% December.
With more jobs being created it also means companies are likely to offer pay rises to attract and retain good staff.
Companies are expected to raise investment and production, pay off debts and take on more staff to take advantage of the lower cost of living. It is likely to produce a boost for the Tories at the polls as ministers claim they are putting more money into people’s pockets.
But economists have warned that the feelgood factor won’t last and that measures should be taken to avoid deflation and increase interest rates to avoid problems further out.
The fall in inflation is attributed to the slump in the oil price leading along with a supermarket price war. However, a period of deflation would encourage people to deter spending and cause stagnation in the economy.
James Sproule, chief economist at the Institute of Directors, said: “Inflation continues to fall and households and businesses continue to feel the benefit. Tumbling energy costs, combined with a pick-up in wages and strong growth across the economy are resulting in a feel-good factor for consumers and businesses, with two-thirds of IoD members saying they are optimistic about the future.
“There is a widespread acceptance that should the UK dip into deflation it will be temporary. Businesses are looking at how they can make the most from the unexpected windfall and we expect a boost in investment in this period as companies invest in growth by increasing production, paying off debts, taking on staff or offering sustainable pay rises.
“Nevertheless, today’s figures must not stand in the way of starting the process of normalising interest rates. Keeping the base rate at its extraordinary low of 0.5 per cent while the economy is growing and productivity is improving could be a dangerous decision. For rate rises to be gradual, they must start soon.”
Good news for retirees
The low inflation rate is good news for retirees whose savings are eroded when prices are rising.
Vanessa Owen, Head of Annuities and Equity Release at LV=, said: “The fall in the rate of inflation is great news for those concerned about the cost of living. This is particularly important for retirees as they are often hit hardest by rising inflation. This section of society often spends a significantly higher percentage of their disposable income on bills, such as electricity.
“With people spending longer in retirement, the risk of inflation reducing the value of their capital is an issue that needs to be considered when deciding how to take an income from their pension fund, especially for those who are planning to take their savings as a lump sum.
“There are retirement solutions available that provide an element of inflation-proofing, yet the majority of retirees buy annuities on a level basis. However, since the Budget, we have seen this start to change, with those approaching retirement now looking for alternatives such as income drawdown, fixed term and investment linked annuities. We always encourage savers to shop around in order to make the most of their pension pots and achieve the level of income and flexibility they require.”