This year could also be a “crucial” one for the eurozone, with at least one country leaving the single currency market, the influential Centre for Economics & Business Research (CEBR) said.
The group’s forecast of looming “negative inflation” comes as lower fuel prices pushed the consumer prices index (CPI) to a 12-year low of 1 per cent in November, down from 1.3 per cent the previous month and well below the Bank of England’s 2 per cent target.
While remaining generally upbeat about the economy, the CEBR said: “Inflation could even be negative on the CPI measure in the spring and summer for the first time ever and on the RPI [retail prices index] measure (on an underlying basis) since April 1960. The last full year of negative inflation in the UK was 1933 when inflation was minus 2.2 per cent.”
Britain’s UK grocery market, dominated by the big supermarkets such as Tesco, Asda, Sainsbury’s and Morrisons, has already gone deflationary.
Recent figures from Kantar Worldpanel showed that like-for-like prices in the food retailing sector declined 0.2 per cent in the 12 weeks to 12 October, as the big four launched aggressive price promotions on basic goods such as vegetables and milk in response to the growing challenge from discount chains Aldi and Lidl.
Many economists worry about the debilitating effect of deflation on economic growth because consumers are tempted to put off purchases in the expectation that prices will fall further.
One City economist said yesterday: “I agree that there is quite a reasonable prospect of negative inflation in the UK in 2015. The worry is that although it is good news for consumers’ wallets in the short term, it can reach a tipping point where deflation actually depresses economic growth rather than stimulate it as shoppers sit on their hands to await further price declines.”
However, the CEBR is more optimistic in its report. It said: “The UK should continue to do fairly well and growth might surprise on the upside.”
The forecaster was virtually spot-on last year with its forecast of UK economic growth of 2.8 per cent against a likely outcome of 2.9 per cent for 2014.
The CEBR also said that with a snap Greek general election scheduled for later this month, and the possibility of anti-austerity party Syriza gaining power, there is “a more plausible scenario” of the country leaving the euro.
Although a slew of other elections are pencilled in for 2015, including in the UK, Argentina, Canada, Mexico, Portugal and Spain, the CEBR warned: “The Greek election might be the most important, because it could lead to the break-up of the euro.”
It said the UK general election in May “has every prospect of ending up as a real mess”, with no party securing an overall majority again following five years of the Conservative and Liberal Democrat coalition.
Potential tactical alliances mean a possible “unstable” scenario of Labour leader Ed Miliband in power, but without winning the majority of UK votes, the think-tank said.