Food and energy prices push UK towards deflation

Some economists think the monthly update from the ONS could already show deflation. Picture: John Devlin

BRITAIN’S inflation rate is close to zero, putting the UK economy on the brink of deflation for the first time in half a century, official figures are expected to reveal this week.

Analysts expect the UK’s consumer price inflation (CPI) figure for February, which is released tomorrow, to fall from 0.3 per cent in January, driven by lower energy and food prices.

Some economists think the monthly update from the Office for National Statistics could already show deflation, for the first time since a period in 1960.

According to analysts at the investment bank Credit Suisse, tomorrow’s data is likely to show CPI at 0.1 per cent, with energy prices falling 10 per cent from February last year after cuts to gas prices took effect.

“Our inflation forecast is 0.1 per cent, from 0.3 per cent in January,” Victoria Clarke from strockbroker Investec, said yesterday.

“Inflation could fall further and even turn negative in the spring, with British Gas’s 5 per cent price cut set to hit the March numbers,” she added.

Howard Archer, of the forecaster IHS Global Insight, said: “Given the weakness of oil and food prices, consumer price inflation may well test zero during the next few months and it will likely remain below 1 per cent to the end of the year.”

Andrew Haldane, the Bank of England’s chief economist, suggested last week that interest rates could be cut to zero in the coming months to head off the threat of deflation, saying that the monetary policy committee should worry that inflation had “dropped like a stone”. Mr Haldane said the committee believed inflation would remain close to zero in the near term before rebounding in the next two years.

He added: “The risks to inflation at that horizon are plainly two-sided.

“But my personal view is that these risks are skewed to the downside. In my view, that means policy needs to stand ready to move off either foot in the period ahead.”

Mark Carney, the Bank’s governor, had warned earlier this month that it would be “extremely foolish” to cut interest rates. He told the House of Lords economic affairs committee that low oil prices would have an effect on the economy long before a cut in interest rates kicked in.

“The impact of that extra stimulus would happen well after the oil price fall had moved through the economy and we would just add unnecessary volatility to inflation. That would be foolish,” Mr Carney said.

The Office for Budget Responsibility (OBR) last week cut its inflation forecast for 2015 to just 0.2 per cent – down 0.9 percentage points on its December forecast. But the independent fiscal watchdog said it did not expect the government’s 2 per cent inflation target to be hit until 2019 – two to three years later than the Bank has forecast.

Michael Saunders, an economist with Citi, expects Bank rates to stay at 0.5 per cent this year, reaching 1.5 per cent by the end of 2016 and 2.5 per cent at the close of 2017, alongside, a gradual unwinding of the Bank’s £375 billion of quantitative easing.