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Q&A: What impact will drop in inflation actually have?

Published 14/04/2015

We assess the impact of a drop in inflation for all concerned in Northern Ireland.

Q Has this happened before?

A CPI has never turned negative since comparable records began in 1989. According to an experimental data series by the Office for National Statistics (ONS) going back to 1950 it was last negative, at minus 0.6%, in March 1960.

Q Would it mean the pound in my pocket is worth more?

A Yes. CPI at minus 0.1% would mean a basket of goods worth £100 a year ago is now worth £99.90. Low inflation has been driven by falling petrol and grocery prices.

Q Is there a downside?

A Sustained falling prices could mean shoppers putting off purchases and firms delaying investment, while mortgages become less affordable, especially if wages drop. But this is thought unlikely.

Q What will this mean for the General Election?

A Coalition politicians will hope added purchase power creates a feel-good factor as well as boosting consumer spending and lifting the economy. But the boost to growth might come too late to affect the poll.

Q How will this affect interest rates?

A The Bank of England must try to return inflation towards its target of 2% so low CPI should mean rates at 0.5% for longer. Deeper or more prolonged negative inflation could create growing speculation of interest rates being cut even further.

Belfast Telegraph

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