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Inflation turns negative - just

Published 14/04/2015

The Consumer Price Index measure of inflation sank to 0% in February
The Consumer Price Index measure of inflation sank to 0% in February

Inflation turned negative in March for the first time in more than half a century - but only by the narrowest of margins.

Officially the Consumer Price Index (CPI) measure of inflation remained at zero, the same as in February, but calculated to two decimal places it slipped from plus 0.03% to minus 0.01%.

Economists predicted it could fall further in coming months.

CPI is at its lowest since comparable records began in 1989. It was last negative, according to an experimental data series, in March 1960 - at minus 0.6% - when Harold Macmillan was prime minister and Dwight Eisenhower US president.

Some economists had expected inflation to fall as low as minus 0.1%, but the continued "noflation" still sent the pound lower against the US dollar as it cements expectations that interest rates will remain at 0.5% into next year.

Sterling is close to lows last seen in June 2010.

Chancellor George Osborne said: "Our plan for working people gets another boost today with good news for family budgets - inflation at zero for second month in a row."

But Labour's Chris Leslie, shadow chief secretary to the Treasury, said: "A few months of falling world oil prices won't solve the deep-seated problems in our economy or make up for years of bills rising faster than wages."

The marginal decline in prices means that a basket of goods and services worth £100 in March last year would have cost £99.99 this year.

Inflation has been pushed lower by tumbling petrol prices and the supermarket price war. Together the two factors dragged on the latest CPI rate by 0.8%.

Meanwhile, clothing and footwear, which normally see price rises between February and March as they recover from the sales at the start of the year, dropped slightly, largely caused by women's outerwear such as dresses, trousers and cardigans.

The largest factor preventing a fall to outright negative inflation was the increase in restaurant and hotel prices, though this was still a weaker rise than last year

Retail Prices Index (RPI) inflation, a separate measure which includes housing costs, fell to 0.9% from 1% in February.

The Bank of England has said it expects CPI inflation to drop below zero at some stage in the coming months.

Officials and coalition politicians have been bullish about the effect of low inflation, which is seen as providing a boost to spending power, helping consumers to feel better off and spend more money in the shops.

Low CPI means that although wage growth has stuttered, slipping to 1.8%, it is positive in real terms. Latest pay data are due to be published alongside employment figures on Friday.

Today's inflation figure will trigger a letter from Bank of England governor Mark Carney to the Chancellor, since CPI remains more than 1% off its 2% target, three months after an earlier letter was required.

Mr Carney previously had to write to Mr Osborne after inflation was shown to have fallen to 0.5% in December. The next letter will be published alongside the Bank's inflation report on May 13.

Such letters have mainly been written in the past because inflation is too high.

But officials also want to avoid a prolonged spiral of falling prices which might threaten to deter consumers spending and businesses from investing while making fixed repayments such as mortgages more expensive in real terms.

This persistent "deflation" is currently thought to be unlikely.

Vicky Redwood, chief UK economist at consultancy Capital Economics, said: "The UK just avoided deflation in March, but inflation could yet dip into negative territory at some point in the coming months.

"While there is a danger that this affects pay growth and inflation expectations, prompting a more prolonged period of zero inflation, this looks unlikely to us.

"Indeed, low inflation rates should be welcomed as giving a boost to the spending power of firms and households."

Howard Archer of IHS Global Insight said the Tories and Liberal Democrats would be pleased to see CPI remaining flat.

"Any boost to purchasing power is helpful to their hopes that voters will feel happier with their current situation and more inclined to vote for them in May's general election," he said.

"Mild deflation could very well occur in April, given the reduced prices during the month from the earlier Easter this year and given the ongoing weakness of food prices. Furthermore, utility price cuts are still kicking in."

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