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Economists tip return to zeo for CPI inflation rate

By John-Paul Ford Rojas

Published 14/09/2015

Inflation has been held back this year thanks to low oil and commodities prices
Inflation has been held back this year thanks to low oil and commodities prices

Inflation is expected to have slipped back to around zero when official figures for August are published on Tuesday, offering the latest clue about when interest rates might rise.

The Consumer Price Index (CPI) measure of inflation has hovered near zero since February and was 0.1% in July. It means consumers are enjoying a period of no increase to the cost of living.

Near-zero CPI also means the Bank of England does not face immediate pressure to raise rates from their current level of 0.5%, where they have been for more than six years, sparing borrowers higher repayment costs, but hurting savers.

Turbulence in global markets, shaken by signs of a slowdown in China, and gloom over the UK economy - after the Bank cut its forecast for third quarter growth from 0.7% to 0.6% - have pushed back expectations about when rates will be hiked.

A number of economists expect CPI to have fallen to zero in August, with the possibility that it turned negative. Figures will be published by the Office for National Statistics (ONS).

If inflation does go below zero, expectations for a rates hike are likely to be driven back further into next year. CPI was minus 0.1% in April and was last lower than that, according to experimental data, in March 1960 at minus 0.6%.

Should it hold firm or increase, it could embolden those Bank policy makers who feel that the strength of the recovery means underlying inflationary pressures are building in the economy and are inclined to vote for a rates hike.

Bank governor Mark Carney said last month that he "wouldn't be surprised if we have another month or two of negative inflation" but maintained that the likely timing of an interest rates hike was "drawing closer".

He previously said the decision was "likely to come into sharper relief around the turn of this year".

Inflation has been held back this year thanks to low oil and commodities prices, and recent fears of a slowdown in China have kept up the downward pressure.

It has also been kept low by strength of the pound, which makes imported goods cheaper.

The price war fought by supermarkets as they battle the threat of discounters Aldi and Lidl is a major factor weighing on CPI.

July's figures showed the 13th month in a row of food and non-alcoholic beverage prices falling year-on-year, the longest stretch of price falls for these products on records going back to 1989.

Investec economist Philip Shaw predicted CPI slipping back to zero in August with fuel prices having fallen and with the absence of an upward blip in July caused by the timing of summer clothes sales offers.

But he said there was a "significant risk that it heads back into negative territory" especially if there is a bigger than expected impact on food prices from the strength of the pound.

Howard Archer, chief UK and European economist at IHS Global Insight, also said he expected to see CPI dip to zero in August but it was "not inconceivable that the UK could have experienced marginal deflation in August".

Experts at Oxford Economics expect inflation to have fallen to minus 0.2%.

Online Editors

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