Want to profit from 'joyflation'? Remortgage now

Inflation is at a record low and ‘bad’ deflation is off the cards, so make the most of ‘joyflation’ – remortgage at a cheap rate, says John Stepek.


Inflation in the UK is at a record low. Annual inflation, as measured by the consumer prices index, fell to just 0.5% in December well below the Bank of England's 2% target. And it's set to get even lower. When the Bank's boss, Mark Carney, writes to George Osborne, the chancellor, next month to explain why he is obliged to do this when inflation falls below 1% he'll have to admit that it's likely to be the first of several. In fact, Carney has even said that, with the oil price still collapsing, prices might even start falling in other words, we might end up with deflation.

Deflation is the modern central banker's biggest bogeyman mere mention of it conjures up images of Japan's lost decades. So should we be worried?

We're not known for being overly optimistic here at MoneyWeek. But for now at least, it's hard to argue that Britain is at risk of bad deflation. It's certainly an issue elsewhere and there's every possibility that in the longer run it could become a global issue. But for now as Channel 4's Paul Mason puts it in a spoof letter from Carney to Osborne "You face a unique situation in modern British history: low inflation and high growth. And an election. Enjoy."

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What's holding back inflation?

Let's look at the inflation figure in a little more detail. Prices rose by 0.5% in December, a lot lower than the 0.7% expected. But the key is to look at what's driving this slowdown. Bad deflation is what you get when companies are cutting back, people are being laid off, and demand is tumbling, which in turn hits corporate profits and leads to more layoffs in a vicious cycle that's what you've got in Europe.

But in Britain, the main thing holding back inflation is the recent plunge in oil prices. As the Financial Times notes: "almost all the drop in December was because of falling fuel prices and household gas and electricity bills remaining stable, rather than rising". Meanwhile, with supermarkets now realising that the only way to tackle discount stores is with full-blown price wars, prices in the shops are likely to get lower too. This is not a bad-news scenario not for consumers at least and it's not the sort of thing that triggers a deflationary spiral. As Rob Wood of Berenberg Bank puts it in the FT, "no one is likely to delay buying a television because they found it cheaper to fill up the car with petrol and the store was offering cheaper credit".

Researchers at Oxford Economics called it "joyflation" more and more people are in work, but their key living costs are either falling or not rising very quickly. The chart below shows what they mean. The "misery index'" dreamt up in the 1970s by US economist Arthur Okun when inflation and oil prices were soaring, along with the jobless rate adds the unemployment rate and inflation rate together to give a view of how grim life is for the population. Currently, it's at its lowest level in the UK since at least 1989. You might not feel like jumping for joy, but it certainly makes talk of a cost-of-living crisis look out of touch.


Need further proof that this isn't a looming deflationary crash? Just look at the inflation measure we all used to prefer right up until 2003 the retail prices index (RPI). In the crisis years of 2008 and 2009, while CPI remained well above the 0% mark, RPI spent much of the time below -1% firmly in deflation territory. That was a proper crisis. But if you look at RPI today, it's sitting at 1.6%. Equally, if you look at core inflation which strips out volatile things like fuel and food prices (and which central bankers have often used in the past to justify keeping rates low when inflation is above target) then it actually rose in December, from 1.2% to 1.3%. That's lower than normal, but it's not into spiral territory.

The best ways to benefit

What does this mean? For a start, it means that Carney is under absolutely no pressure to raise interest rates before the May election (as many had expected last year). Indeed, the City now expects that we won't see a UK rate hike until 2016 at the earliest. In the immediate term that's not good news for savers you might finally be getting a real return on your money, but there's no imminent prospect of better rates being available. You might even be tempted to lock your money up in a long-term savings bond.However, we'd be wary of acting too quickly. The long-term rates on offer are generally poor, and if this really is just a disinflationary blip, you might regret locking up your savings for a long time. As Vicky Redwood of Capital Economics points out, there's a possibility that an interest-rate rise might even still happen this year. If consumers have more money in their pockets and the employment outlook remains positive, then this would boost the economy, and thus the medium-term inflation outlook. So "a brief period of falling prices in the short term could in theory make a rate rise more likely". Of course, we suspect that Carney would rather use the excuse of a low headline number to keep interest rates low, then worry about rising inflation later.

"There's one group of people for whom this is very good news those with lots of debt."

That's one reason why we're hanging on to a nice chunk of gold in our portfolios. And it's another good reason not to lock up your cash for too long. Indeed, if Carney decides that he isn't going to "look through" the oil-price drop and ignores the threat of medium-term inflation, then when he finally does act, rates might have to rise a lot more quickly and a lot further than they otherwise would have.

So what's the best way to benefit? There's one group of people for whom this is very good news those with lots of debt. Debt is a bad thing to hold during genuine deflation (the cost of servicing your debt goes up while your wages are static or under threat). But with key living costs falling and wages (according to the Office for National Statistics) still rising ahead of inflation, that's not where we are at the moment. But with markets worldwide now not expecting much by the way of rate rises in the near future, the cost of debt remains very low in fact, for some products, it's the lowest ever.

So while we're not desperately keen on the UK property market (and London in particular) as an investment, if you are buying a property or you already own one, now is looking a very good time to remortgage and lock in a nice, low, long-term rate. See below for more.

The cheapest mortgages ever

Looking for the deal of the decade? The mortgage market might be the place to start your hunt, writes Merryn Somerset Webb. The Bank of England put out figures this week showing that mortgage rates ended last year at their lowest levels for at least 20 years (detailed records only began in 1995). Given that the bank rate is at its lowest level ever, it seems safe to say that these might be the cheapest mortgage rates on record too.

The average two-year fix can now be had for a mere 2.08%. The average two-year variable rate comes in at 1.63%. And the average five-year fix (assuming a 25% deposit) will now only cost you 3.21%. HSBC has one of the cheapest on the market if you have a 40% deposit they'll lend you money at 2.48%, and First Direct has an offer at 2.39%.

But if you think that's cheap, consider this: HSBC has just come up with a two-year fix at 1.29% (with a 40% deposit), while Barclays has just launched a ten-year fixed-rate mortgage with the "lowest-ever interest rate" for such a product, says Lisa Bachelor in The Guardian. If you have a 60% deposit (or equity to the value of 60% of your house), you can now borrow at a rate of 2.99% for ten years (down from a previous rate of 3.45%). That is a genuinely cheap deal and it's a direct result of there being some real competition in the ten-year mortgage market for the first time in the UK. A year ago, there were only eight ten-year offers in the market. Today, says Sylvia Waycot of Moneyfacts, there are 77. In the past the main reason to avoid ten-year mortgages has been FOMO fear of missing out if rates fall lower. But at the moment, while rates can of course go lower than they are in a very low-inflation environment (a 2% interest rate can halve pretty quickly), the scale of the risk is clearly lower than in the past.

However, before you jump on any cheap deals, do bear in mind that the mortgage market hasn't abandoned its profiteering tricks just because interest rates are so low. Far from it. The First Direct five-year fix mentioned above comes with an unnecessarily high fee of £1,450 and the Barclays ten-year fix comes with one of £999. There are also some nasty bits and bobs in the small print of the latter: if you want to exit the deal in the first seven years, you will pay a fee of 6% of the value of the outstanding loan. And don't think that you can avoid that by taking the mortgage with you if you move within ten years (as most people do!) there is no guarantee that the lender will agree to port the loan to your new house. TSB offers a ten-year deal you might want to look at instead: the rate is higher (3.44%), but there are only redemption fees for the first five years and there is no up-front fee.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.