UK inflation falls to zero as price of key goods drops
Inflation has continued its slide with a new record low, after the Consumer Price Index (CPI) fell to zero in February.
A decline in the price of food, tablets, laptops and furniture were the main causes for the rate to fall from the record low rate of 0.3% in January. The stagnation means that a basket of goods costing £100 in February last year cost exactly the same last month.
Since June last year, when CPI was 1.9%, there has been a rapid drop in the rate.
In that time the oil price has plummeted from $107 a barrel of brent crude down to below $50 in January. It has since risen to around $55 a barrel.
In February the cost of motor fuels, including petrol prices, fell by 16.6% year-on-year and food prices were down 3.4%. Core inflation, which excludes energy, food, alcohol and tobacco, fell from 1.4% in January to 1.2% last month.
Angela McGowan, chief economist at Danske Bank, said the UK is likely to see prices fall again before they rise. She said: "It is expected that the UK's headline inflation rate will dip into negative territory in the short-term but the key issue for the Bank of England is around 'inflation expectations' and whether or not this temporary blip in the inflation rate starts to influence wage negotiations and business investment - hopefully not. Core inflation at 1.2% would suggest that there are limited deflationary tendencies in the UK, meaning that prices are falling because of temporary factors and are not due to weak demand."
Ms McGowan added that she believed the CPI should start to increase later this year. "Inflation levels are expected to start moving upwards in the second half of this year as the impact of lower oil costs start to fade but getting CPI back to the 2% target may not happen until late 2016 or early 2017," she said.
Richard Ramsey, chief economist at Ulster Bank, said while the UK may see negative inflation, it should not enter a deflationary crisis like Japan.
Japan "was characterised by falling demand - whereas the disinflation in the UK is due to the huge fall in oil prices and falling food prices and not a fall in demand," Mr Ramsey said.
"This will pass with CPI expected to rise towards 2% over the next two years. Therefore genuine deflationary concerns within the UK should only materialise if core CPI goes into negative territory. It is noted that the headline rates of CPI inflation in the eurozone (-0.3%) and the Republic (-0.4%) are already in negative (deflation) territory."
Dr Esmond Birnie, chief economist at PwC Northern Ireland, said the fall in CPI should see real wages increase.
"The ONS data suggests that, while some costs such as clothing are beginning to rise, growth in UK domestic demand remains relatively buoyant, effectively putting real wages back on an upward track for the first time since the recession," he said.
"That's especially welcome in Northern Ireland, where there is considerable ground to make up in terms of reversing the decline in real wages which occurred after 2008."