UK deflation hits record levels

Published on Tuesday 19 May 2009 13:08

UK deflation moved into record territory last month, official figures showed today.

The headline Retail Prices Index (RPI) fell from minus 0.4% to minus 1.2% in April, the Office for National Statistics (ONS) said.

The RPI turned negative for the first time in almost 50 years in March and is now below the all-time low of minus 0.8% recorded in June 1959. ONS records began in 1948.

The fall reflects lower mortgage interest payments and house prices as well as recent cuts in gas and electricity bills.

The Consumer Prices Index (CPI), which does not include mortgage and house prices and is used by the Bank of England to target inflation, fell from 2.9% to 2.3% in April, the lowest since January last year.

The RPI's move downwards follows the Bank of England's interest rate cut to an all-time low of 0.5% in March, bringing reduced mortgage payments for many households.

The slide in RPI exceeded the expectations of City analysts, who were looking for a fall to minus 1% this month.

RPI deflation should peak in September because after that, the dramatic rate cuts introduced by the Bank last year to tackle the financial crisis will begin feeding into the index.

Unchanged rates this year compared with cuts a year earlier will create an inflationary effect and drag the RPI back towards positive territory.

CPI has not fallen as far because it does not include mortgage costs and house prices, but is now falling steadily back towards the Bank's 2% target and is set to slide below it later this year.

April's fall comes after cuts in gas and electricity bills, compared with hikes a year ago, water bills which rose at a slower rate than a year earlier, and lower rental costs.

Food prices also dragged CPI lower as falling vegetable and meat prices this year contrasted with rising costs a year earlier.

Alcohol and cigarette prices also rose a year earlier in response to Budget duty hikes but this year's price increases were a month later in coming through. This brought the CPI lower, as well as items such as lower mortgage arrangement fees.

These factors outweighed the upward effects from rising transport costs, with average petrol costs rising by 4p to 94.4p – compared with a 1.9p rise 12 months earlier – partly due to Chancellor Alistair Darling's fuel duty hike.

Rising second-hand car prices also pushed car costs higher this year, while telephone landline charges and mobile phone handsets were dearer.

Jonathan Loynes, of Capital Economics, said today's figures served as a reminder that excessively low inflation, or deflation, is still a bigger risk over the next few years than a rapid rise in inflation.

Howard Archer, chief economist at IHS Global Insight, said the data reinforced his view that interest rates will stay at 0.5% for an extended period and that the Bank of England will press ahead with its quantitative easing programme.

"Despite recent increased sightings of green shoots of economic recovery, there are still an awful lot of weeds around that could strangle them so the danger of prolonged deep recession still outweighs

inflation risks," Mr Archer said.