The disappearance of normal spending habits has created problems for the statisticians who calculate the rate of inflation.

Source: Office for National Statistics

Inflation, as measured by the Consumer Prices Index (CPI), fell sharply in April to just 0.9% against 1.5% in the previous month. The main reason for the drop was energy costs:

• Ofgem’s new price caps for gas and electricity standard variable rate took effect in April and these were about 10% lower than the rates from April 2019. Even so, the bills set by the caps are generally much higher than those that can be found on any comparison website.
• Petrol and diesel prices were also much reduced year on year – by 15.1p a litre for petrol and 17.0p a litre for diesel.

Missing items

In addition to the sharp moves in energy costs, there was also a serious problem with gathering the data. The Office for National Statistics (ONS) has an annually reviewed ‘shopping basket’ of goods and services which it uses to calculate the various inflation indices. However, for the latest numbers, the ONS discovered about 90 of the items in its basket – about one sixth of the total value – “were unavailable to consumers in the UK”. Haircuts, cinema tickets and a pint in a pub are just some of the many examples. Other items were theoretically available but in short supply, making the ONS’s price-tracking task more difficult – self-raising flour being a typical problem item. Ultimately the ONS was forced to “impute” (i.e. estimate) some prices.

Although some of the goods are still available, the restrictions on our movements mean they are no longer being bought. The ONS basket contains items which can be bought but are just being ignored in lockdown – many travel services fall into this category. For now, at least, the basket is not representative of historical spending patterns. We may find that creates problems in the long term, as inflation indices are widely used by government to adjust benefits, prices and tax allowances.

Inflation may be under 1% and somewhat distorted at present, but it has not gone away. Some economists fear that it could roar back because of all the borrowed money being pumped into the economy by the government. Others think a recession/depression will keep inflation in check. Either way, it still needs to be factored into your plans: £1 in April 2015 has only 92p of buying power today.

The state pension triple lock may not survive much longer.

The impact of Covid-19 on earnings could mean a change in the way that state pensions are increased in each year. If nothing is done, it could give pensioners a large income boost, but cost the government dearly.

At present, the new (single tier) state pension and its predecessor, the basic state pension, both benefit from increases based on the ‘triple lock’. This was introduced by the Coalition government in 2010 and means that these two state pensions increase each April by the greater of:

• yearly CPI inflation to the previous September;
• average weekly earnings growth to the previous July; or
• 2.5%.

This basis means that for 2021, the increase is likely to be 2.5% because CPI inflation will be lower (it was 0.5% in May) and earnings could well be falling due to the impact of furloughing.

It is in 2022 that a potential problem emerges for the Treasury. The furlough scheme ends at the end of October 2020, and if the economy starts to recover, by July 2021 earnings could be back to near ‘normal’. The fact that by then some of the formerly furloughed employees will be unemployed makes no difference to average earnings figures.

Economists reckon that the difference between ‘normal’ average earnings in July 2021 and furlough-depressed average earnings in July 2020 could be significant. In its Covid-19 ‘reference scenario’ the Office for Budget Responsibility has estimated earnings growth of over 18% in 2021 (against a 7.3% fall for 2020). No Chancellor would want to fund such a large rise in state pensions, not only because of the expense, but also on grounds of intergenerational fairness.

The Treasury and many economists have long argued that the triple lock is an unnecessary cost, but politicians have always been wary of upsetting an important section of the electorate. This additional problem now created by Covid-19 gives the government the best justification it is ever likely to have to dispense with the lock. There are even suggestions that state pensions could be frozen for the next two years until the issue (hopefully) disappears.

State pensions play an important role in many people’s retirement income planning, but their payment is ultimately a state decision, as evidenced by the many changes of recent years (for example to starting age). For that reason, if no other, private provision remains a vital component of your retirement planning.

Help for consumers to manage their credit and debt has been extended to the end of October.

In mid-June, the Financial Conduct Authority (FCA) told firms to extend measures to provide help to people with credit cards, store cards, catalogue credit and personal loans who faced difficulties with their finances as a result of the Covid-19 crisis. This help was set to last initially for three months from April, but a recent update means there will now be a further three months’ flexibility ending on 31 October 2020.

Payment freeze

If you have already taken a payment freeze, you may now be able to take a further payment deferral or reduce payments to what you can afford. For anyone who has not yet requested a payment freeze, they can do so during the extended period.

A very important consideration is that you must still pay the debt back at the end of the deferral period, so there is potential to simply store up problems for a later date. With many people now returning to work, it makes sense to try to resume payments as soon as possible. It is at the discretion of the firm involved whether you will be charged interest during the payment freeze.

In theory, payment deferral should not affect your credit rating, but there is no guarantee that all loan providers will abide by this.

Overdrafts

Bank customers have been able to apply for an interest-free overdraft of up to £500. The interest-free period will now also run until 31 October 2020. Anyone who has not yet taken advantage of this measure has further time to do so. You can also request a lower rate of interest on borrowing in excess of the £500 interest-free buffer.

However, the FCA has not extended the temporary measure that meant overdraft customers were no worse off, with regards to their potential overdraft charges, than before April when a new temporary pricing structure for overdrafts was introduced. Although only a single rate of overdraft interest can now be charged, this can be around 40%.

The FCA provides detailed guidance on what Covid-19 means for your finances.