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I hear on a regular basis about how the economy is ruined and how everything is going wrong, with house prices falling rapidly and lenders only approving 10% of the mortgages in Jan 2009 as they did in January 2008, so it would be natural of me to assume that house prices would be very low currently. Wrong, I looked at house prices near me recently and they are still very expensive.

I then decided to look into the cost of mortgages, by looking at some comparison websites and I was staggered to find that even though the Bank of England base rate is at an all time low of 0.5%, you could not borrow money for less than 4%, and this is despite the fact that the UK government now owns a controlling interest in most of the high street lenders, and has lent money to the rest!

You would think that if the government of this country knew what they were doing, they would have insisted that before they lent money to or bought into the failed UK banks, they would have got some cast iron contracts in place to ensure that the monetary policy the Bank of England is pursuing would be translated both in terms of existing tracker or variable rate mortgages, but also new lending.

It seems they didn’t, and as such the UK taxpayer has simply been taken for a ride by the banks who are now sucking up this “aid” money from the UK government and doing nothing with it other than increasing their capital reserves. The whole point of the government stepping in was to ensure that a, the banks didn’t fail, and b, that they started lending money to people (and not just the AAA rated people that didn’t really need to borrow money, everyone), and c, that they started lending money at sensible rates of interest.

So why has this not happened? I can only assume that as with Sir Fred Goodwin of RBS, the government have been taken for a ride - when will they learn not to trust city bankers?

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With the economy firmly in a recession, its at this time that consumers have to start thinking about tightening their belts in an effort to cut costs and save a bit more money for a rainy day. Clearly for some people I am preaching to the converted, but for many others out there, the idea of living frugally seems somewhat of a necessary evil in the current economic climate, so it’s best to ease the pain as much as possible.

Frugal Living Tips - No. 1

If you are used to buying a new car every few years, then don’t! The first three years of a car’s life are when it depreciates (loses value). It’s a much better idea to buy a car that’s already three years old and replace every two years. This way you will get some other sucker to pay for the depreciation, while you still get two years of hassle free, low service costing years of motoring for a fraction of the price of new car ownership.

If you’re worried about the plate, simply use a small fraction of the money saved on an private plate that doesn’t give away your cars age, simple!

Frugal Living Tips - No. 2

If you are used to living the high life and eating out on a regular basis, then continue, just alter your habits slightly. Cut down your weekly eating out slightly, if you usually go out three time a week, cut down to two times a week, or swap one night for a night at the cinema, much cheaper. If you really can’t cut back, either cut back on the amount of wine you order, or simply switch to a BYO (bring your own) restaurant and take along a bottle of plonk from the supermarket, it’ll no doubt be at least half price compared to the same bottle on the wine list.

Frugal Living Tips - No. 3

Go through your monthly outgoings and work out which ones are a complete waste of money. For example, are you paying £12 a month to your bank to be part of their (slightly pretentious) premier or advantage account? It usually means you get some free breakdown cover and a crummy amount of life insurance that wouldn’t be enough to pay for a funeral! Cancel this and use your banks’ normal, non-premier banking service, breakdown should only cost about £40 a year and if you have a mortgage you should already have enough life insurance.

You may find in the process of doing this that you are shelling out for a gym membership each month - ask yourself this - how many times do you use it? If you use it less than 10 times a month, realistically it’s not worth it and you should stop wasting your money.

Review your sky/cable package, you may find you’re paying way over the odds. This can usually be rectified by cutting back on some of the channels you have or switching to a cheaper supplier.

Remember though that this cost cutting is not meant to increase your disposable income such that you can go out and spend these savings on something nice, the idea is to put the money away into a savings account for a rainy day. It’s no good making budget cuts on non-essentials if you then go and blow the resultant monthly savings on some other tatt that you didn’t need!

We regularly make predictions on this site about where the Bank of England base rate will be on our interest rate predictions pages, and following on from the popularity of these pages, we have decided to expand this into inflation predictions, with this being the inaugarul post about UK inflation predictions.

It’s quite pertinent predicting the inflation coming off the back of yesterday’s interest rate reduction, which I completely didn’t predict - I expected it to be held, as I stated in my interest rate predictions for Thursday 5th March.

So what does the rest of the year hold?

Well let’s firstly consider what impacts inflation. There is always upward (inflationary) pressure on an economy, as well as downward (deflationary) pressure on an economy.

What causes inflationary pressure on the economy?

This can vary, so here are some of the usual culprits:

• Short supply of goods/services (demand is outstripping supply)
• Higher costs of importing raw materials (this can be caused by a weak £ or higher global prices)
• Monetary policy, in effect increasing the supply of money by making credit cheaper
• Fiscal policy, in effect increasing the supply of money by reducing the tax burden on consumers/businesses

What causes deflationary pressure on the economy?

This can also vary, but here are some of the usual suspects:

• Excess supply of goods services (supply outstrips demand)
• Lower costs of importing raw materials (can be caused by strong £ or weak global prices)
• Monetary policy, by decreasing the supply of money by making borrowings more expensive
• Fiscal policy, decreasing supply of money by increasing the tax burden

Some of you may have noticed that the factors that have inflationary effects, have deflationary effects when the opposite occurs, wierd that? Not really, it’s the age old rule of every action has an equal and opposite reaction.

So what is causing inflationary pressure on the UK economy at the moment?

• The weak £ - making it more expensive to import raw materials and goods into the country
• Easing of monetary policy (base rate being lowered to all time low of 0.5%) thus increasing the amount of disposable income for UK consumers and businesses

However, the monetary policy doesn’t seem to be working, most UK consumers who have variable rate borrowings are doing the smart thing (from their point of view) and banking the money in savings or simply overpaying their debts.

So that leaves the weak £, which is only going to get weaker with the base rate being so low. So that states to me that we could be facing a long period where there is very little inflationary pressure on the economy, and this could prolong the recession. This also means that the policy makers at the BoE and the Govt may have to rethink how they handle this recession and the strategies they employ for recovery.

And what is causing deflationary pressure on the UK economy?

• Weak demand, similar to excess supply, means there are less buyers than sellers effectively, making it more of a buyers market, just witness the housing or new car market to see this in action
• Falling energy prices, this again is largely due to falling demand worldwide, but it has a direct impact on the economy as so many products and services are dependent on energy either directly or indirectly
• Cut in the VAT rate from 17.5% to 15% late 2008, however this is scheduled to revert back to 17.5% in 2010 so will only have a deflationary effect for 2009
• Strength and length of the recession, the longer it goes on, the longer there will be weak demand, which will continue to have a deflationary effect on the economy

The weak demand will continue until consumer confidence returns, so this should last for quite some time yet. This impacts energy prices, as the longer the advanced and emerging economies have weak demand, the longer energy prices will remain low, however, the cartel that controls oil production could vote to lower production levels and thus increase the price of oil by shortening supply.

The cut in VAT will only be a temporary, and largely ineffectual, so not really worth mentioning. The strength of the recession will not be known until after the recession has blown over, we are in effect in the eye of the storm and unable to see how wide the hurricane is that surrounds us, if you pardon the slightly bonkers metaphor.

So what are my inflation predictions for the UK?

Given all the factors that I’ve mentioned so far, it’s hard to see any real good news. The only thing that I haven’t mentioned is the artificial effect that the credit crunch is having on the supply of money. In a normal recession, if the base rate was lowered, there would usually be a subsequent increase in the supply of money, however with the banks trying to re-capitalise and thus not lending money out at anywhere near the rate they are able to, the UK economy is in effect being held to ransom. So it’s really in the hands of the banks to sort this recession, which means that unless credit and cash start flowing again in the economy, there will be far more deflationary pressure on the economy that inflationary pressure, which will lead to the a longer than usual period of recession. I expect that inflation will continue to decline through 2009 and into 2010, but things may start to get better sometime in 2010, but it’s difficult to predict given the unique circumstances facing the economy.

The Bank of England today dropped the base rate to [another] record low of 0.5%. Great news for those of us on tracker mortgages or other loans tied to the BoE base rate! Alongside the drop in interest rates they’ve announced that they’ll be taking measures to increase the level of money in circulation - also known as quantitative easing - by £75 billion, with permission from our dear chancellor Alistair Darling to extend the scheme to £150 billion if needs be.

Sadly the news doesn’t seem to have done much for the stock market, which is down nearly 2%. Perhaps they’re skeptical as Japan has only had limited success as it’s tried various mixes of low interest and quantitative easing over the last decade but still hasn’t managed to sort out its economy.

If you’re anything like me, the thought of frugal living doesn’t exactly inspire you, so I thought it would be a good idea to do an article about ways to make money saving tips, fun or funny to be precise. Here are some ideas I read about on the web or in magazines over the past few months:

John wrote a funny article about reduce your monthly outgoings by going down the gym, it’s not exactly that serious but it can save you money on your home heating, washing and showering bill.

Another idea is to wash your car when it’s raining - thus using non of your own water, you will get wet, but think of the pennies you’ll save!

Take your wife/girlfriend/husband/boyfriend out to dinner - have a very expensive meal, then complain vehemently about the standard of the food, the service, the wine - you should get all or if not all, some of the bill taken off, in return for you shutting up!

If you’re single - go out on lots of dates with people that you normally wouldn’t be seen dead on a date with, then pretend you forgot your wallet, they’ll be so glad you agreed to come on the date, they’ll pay for you!

For our American readers, become an illegal alien - renounce your US citizenship, move to Mexico, then sneak back into the US. You’ll be entitled to many free benefits including healthcare, housing and shooling for your kids!

Buy an owl (electricity monitoring kit) - you’ll get so obsessed with how much you’re spending on electricity that you’ll lose all your friends, won’t have a social life anymore and save a fortune - you’ll probably save some money on your electricity bill as well!

Live life on the trailing edge - downgrade to a VHS cassette player, you’ll find that your local charity shop has plenty of bargain films for you to buy, the only downside is that you won’t be able to watch anything newer than the year 2000!

Drive like a pensioner - driving slowly will save you money on your petrol bill, but will also result in more people crashing into the back of your car, thus meaning you get a new rear end or if you’re lucky, a whole new car every six months or so!

The base rate announcement will be tomorrow lunchtime, at midday, but what will it hold for mortgage holders and savers alike? Will it be good news in the form of cheaper mortgages, at the cost of even worse returns for savers, or will there be a base rate rise?

According to the latest inflation report, February 2009, inflation in December 2008 stood at 3.1%, which is significantly down on what it was the same time a year ago. The predictions stated in the report point to a gradual reduction in inflation over 2009 with it falling to below the Bank of England target (2%) by early 2010.

If this does happen, and the wider economy seems to be on the mend, then we could be in for a gradual increasing of the base rate from early 2010 onwards. However, predictions made in an inflation report published mid February 2009 will not necessarily still be valid come February 2010 - way back in January 2007 the outlook was still very rosy, the same time 2008 and things were somewhat bleaker.

My prediction is that the MPC will leave the base rate as it is at 1%, and wait until they have seen further evidence that the economy is starting to get better. They could be waiting a long time for that to happen, so we could be in for a prolonged period of low interest rates.

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We regularly write about how to achieve financial freedom and ways to earn extra money in your spare time and other related subjects on this website, but we don’t always focus on some of the more humdrum stuff, like how to protect your assets once you’ve acquired some. This article should be a useful guide to either self employed or employed people looking to secure their assets and thus their financial future.

Income Protection

It doesn’t matter if you are employed or self employed, you can still buy insurance to protect your income from accident or long term sickness. However, if you are employed, you can also buy unemployment insurance, which can be used to provide you with an income in case you get made redundant – it won’t payout if you get fired though!

Debt Insurance

If you own your own home with a mortgage, it is very important to take out life insurance, though really in this instance it should be called debt insurance, as it is taken out to repay the debt in the case of your or your spouse’s death. Like all protection insurance, it is cheapest when you are younger, so if you anticipate trading up the property ladder, buy more life insurance than you need now or simply buy on a level basis.

Life Insurance

You should protect your and your spouse’s income in the event that either of you died before pension age. To do this, purchase life insurance in a lump sum equal to your income, less the cost of mortgage (assuming you have debt insurance), divided by a realistic rate of return on safe investments (5% - 10%). This will provide yourself and your spouse with enough money to maintain the existing standard of living should either of you die before retirement age. You can do this with a whole of life policy but it can be much more expensive and you are committed to paying for it for the rest of your life.

Critical Illness

You may become ill at some point, but not die from the illness, in which case all the other insurances so far would not cover you. In this instance, it’s worthwhile taking out critical illness insurance, such that you will receive a lump sum to help with mortgage payments, hospital bills or changes to your accommodation should you be wheelchair bound for instance.

As this insurance is very expensive, it’s usually prohibitive to take out enough to cover your entire mortgage liability, so just take out what you can afford or think of a figure that would be useful to have to help with a life changing illness (£25k - £50K is fairly typical).