CPI may plumb new depths with bout of ‘good deflation'
Inflation figures published today could show that the change in the cost of living turned negative in March for the first time on record.
The Consumer Price Index (CPI) measure of inflation sank to 0% in February, driven lower by falling petrol prices and the supermarket price war.
It has not been lower since comparable records began in 1989. According to an experimental model created by the Office for National Statistics (ONS), it was last lower at minus 0.6% in March 1960.
Some economists expect CPI will have dipped to minus 0.1% in the latest ONS figures, as gas price tariff cuts feed through, though others point to a recovery in petrol prices meaning it could bounce back to plus 0.1%.
The Bank of England has said it expects inflation to drop below zero at some stage in the coming months.
Officials and coalition politicians have been bullish about the effect of low CPI, which is seen as providing a boost to spending power, helping consumers to feel better off and spending more money in the shops. Low inflation means that although wage growth has stuttered, slipping to 1.8%, it is positive in real terms. Latest pay data is due to be published alongside employment figures on Friday.
Meanwhile, the decline in CPI also cements expectations that interest rates — held at 0.5% for six years — will not rise until next year.
Bank of England chief economist Andy Haldane has even floated the possibility of a rates cut, although he appears to be in the minority, with other members of the Monetary Policy Committee maintaining the next move will be a hike.
The prospect of low interest rates for longer is helping keep the pound at near five-year lows against the US dollar, at a time when there is talk of a rates hike in America as early as this summer.
Rate setters at the Bank of England must target inflation at 2%. Its slide to more than 1% off the target, to 0.5% in December, triggered a letter of explanation from governor Mark Carney to Chancellor George Osborne.
The latest figures will trigger a further letter since CPI will have remained off target for three more months.
This will be published alongside the Bank’s quarterly inflation report on May 13. Officials will want to avoid a prolonged period of negative inflation although for now this is not thought likely.
A persistent spiral of falling prices would be feared to cause consumers to put off purchases and firms to delay investment.
It would also mean debt repayments weighing more heavily on households in real terms, especially if wages fall in line with negative inflation.
Samuel Tombs of consultancy Capital Economics said: “We don’t think that deflation is a bad thing in its current form.
“It has been driven by a drop in energy and food prices that is helpful for the economy. And there is still no evidence of more fundamental deflationary pressure.
“We expect inflation to hover around zero for most of this year, before rebounding sharply towards the end of 2015.”
Howard Archer of IHS Global Insight said: “We believe it is highly improbable that UK consumers will start delaying purchases in anticipation of further falls in prices.”
But he added: “Deflation could become a problem for the UK if it caused employers to either hold off from granting pay increases or award very small ones.”