INFLATION fell to zero for the first time in half a century last month putting the UK on course for a period of falling prices.
The Consumer Price Index (CPI) measure of inflation dropped after recording 0.3 per cent in January, the Office for National Statistics said yesterday.
It was a sharper-than-expected fall and sets a new record low for CPI since comparable records began in 1989.
Inflation is expected to dip further in the coming months. An ONS model suggests the last time it was negative was in March 1960, at –0.6 per cent.
The surprise scale of February’s fall is likely to push back the expected timing of an interest rates hike, currently pencilled in for 2016, putting downward pressure on the pound.
Rates have been held at 0.5 per cent for six years. But in a recent speech Bank of England chief economist Andy Haldane has said rates were just as likely to be cut as raised in light of the latest inflation figures.
Low inflation benefits consumers because it means their wages go further, but policymakers fear a prolonged period of negative CPI could have damaging effects, causing consumers to delay spending and firms to put back investment. At the same time, debt repayments such as mortgages would become more expensive in real terms. The figures were hailed by Chancellor George Osborne who said falling inflation would help family budgets.
The CPI is expected to fall further into negative territory in coming months as recently-announced gas price tariff cuts feed through to households.
CPI has been dragged lower by falling oil prices reducing petrol costs and the supermarket price war bringing down food prices.
Mr Osborne said on Twitter: “Inflation at zero is a first for the British economy. Low inflation due to falling oil prices is good news for family budgets.”
He claimed that with prices frozen and the economic recovery in train, Labour’s economic argument had “come to nought”.
But shadow Treasury minister Cathy Jamieson pointed out that it was external factors that had brought down inflation, adding that wage growth in the UK remained sluggish. She said: “A few months of falling world oil prices won’t solve the deep-seated problems in our economy.”
The likely timing of an interest rate hike had already been pushed back by many experts to 2016 but today’s sharper than expected fall will give added weight to expectations that it will be later rather than sooner.
Bank governor Mark Carney has said an interest rate cut would be an option should low inflation persist longer than expected but still expects the next move to be an increase.
Vicky Redwood, chief UK economist at Capital Economics, said: “The UK is now within a whisker of deflation. It looks odds-on that inflation will turn negative in March, when the cut in prices by British Gas [the utility firm with the biggest market share] will show up in the inflation figures for the first time.
“And inflation is then likely to remain around zero/slightly negative for the year. But we doubt this will turn into more serious and engrained deflation.”
Prime Minister David Cameron said: “It is good news that inflation is 0 per cent today. ”
But TUC general secretary Frances O’Grady said: “Stagnating prices are not a sound foundation for the pay rises workers have waited so long for.”
Property value growth slows
House prices fell by 0.2 per cent month-on-month in January as the UK saw signs of a slowdown in the pace of growth in property values, according to an official report.
The average UK house price stood at £273,000 in January, which is 8.4 per cent higher than a year earlier, the Office for National Statistics said. Year-on-year price growth has slowed from a 9.8 per cent increase recorded in December. The typical price paid for a home by a first-time buyer was 9.7 per cent higher in January than it was a year earlier, the figures showed.
Bill Jamieson: Deflation is on its way to the UK but that doesn’t necessarily spell economic disaster
Deflation – a period of falling prices, widely feared by economic experts – now looks about to arrive in the UK. News that consumer price inflation fell to a record low of zero in February has fuelled speculation that the main prices index is set to fall into negative terrain – an experience unknown since the 1950s.
It is likely that the year-on- year rate for CPI inflation will indeed turn negative in coming months. Indeed, CPI inflation, stripping out tax changes, already is slightly negative (-0.1 per cent year-on-year). It conjures up images of Japan-style stagnation: businesses fearful of investing, zero interest rates on savings and households deferring major purchases in the hope of lower prices.
There are certainly consequences that will give concern. But this does not look to be “that” type of inflation. A possible two or three months of a negative CPI can’t be said to be deflation in the strict sense, because it does not signify a “sustained” fall in prices. Indeed, the core CPI’s relative resilience at plus 1.2 per cent indicates that deflation is not about to take hold, nor is it a record low. Indeed, core inflation matches the average for 2000-7.
And the current weakness in prices can be seen as “good deflation” (that is, a boost to real incomes that will lift spending) rather than “bad deflation” (a precursor to renewed weakness in demand). Far from households choosing to defer spending, the prevailing view is that consumer spending will grow robustly this year. UK households are so keen on spending that they have been prepared to take on large amounts of debt, and at credit card double-figure annual percentage rates. It is hard to see that they will now opt for a deferral of spending pleasures, waiting for the slow chemistry of deflation to work its magic and effect a marginal fall in prices. If any economy is likely to be immune to this kind of deflationary process, it is the UK.
Arguably of more concern is that pay settlements will moderate further, under the influence of weak or negative CPI inflation that proves to be only temporary. This is a complete reversal of the worries of runaway pay demands that plagued the UK economy in the 1970s and 1980s. If CPI inflation were to move back up, there would be a squeeze on household spending as pay settlements lagged this development. “This downward pressure on spending,” says economist Stephen Lewis, “could well push the UK economy back into recession.”
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