Inflation slips to zero in August

Picture: John Devlin
Picture: John Devlin
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The cost of living slipped back to zero last month, official figures have revealed, driven by lower petrol prices and a smaller rise in clothing prices from a year ago.

Experts said the long period of “noflation”, where inflation has been either low or zero, has left the average earner more than £500 a year better off.

The Retail Price Index (RPI) measure, however, which takes into account housing costs such as the effect of mortgage rates or council tax, rose to 1.1 per cent from 1.0 per cent in July.

Economists said the news mean that the Bank of England had no reason to start raising interest rates, which have remained at a historic low for ?.

It is expected interest rates will begin to rise early next year.

“With consumer price inflation flat in August and core inflation easing back to 1.0 per cent, there is little immediate pressure on the Bank of England to start raising interest rates,” said Howard Archer, chief UK and European economist at IHS Global Insight.

Low food prices, driven by a battle for consumer spend between discounters such as Aldi and Lidl against the major supermarkets such as Tesco and Sainsbury’s has driven inflation lower. M<eanwhile, a drop in the price of petrol has also pushed the CPI lower. Oil prices hit a six-and-a-half year low of around $42.50 per barrel in August.

Scott Corfe, head of macroeconomics at think tank Cebr. said: “This period of noflation or lowflation – whatever you want to call it – has undoubtedly been good news for the UK. The falling price of essentials has come at the same time as a rapid acceleration in wage growth since the start of the year, boosting discretionary spending power. The UK consumer is supporting the economic recovery at a time when the outlook for exports is bleak as the global economy continues to falter.”

He added: “If price growth had stood at two per cent - the Bank of England’s central target – in each of these years, the inflation-adjusted earnings of the average employee would be £560 (2.2 per cent) lower.”

However, low inflation and low interest rates are not good news for savers.

Calum Bennie, Savings Expert at Scottish Friendly said: “With falling oil prices and the supermarket price war persisting, inflation is not playing ball. This combined with the recent price movements in the clothing and footwear sector has led to CPI remaining flat.

“For savers now could be time to take advantage of any extra money they have left over and put it into investment or stocks and shares ISAs. While inflation is unlikely to rocket any time soon, those looking to prepare for their future should act now to make their money work potentially harder for them in the meantime.”