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Negative inflation 'is good news'

Published 19/05/2015

The ONS is to publish the latest official inflation figures
The ONS is to publish the latest official inflation figures

Inflation turned negative for the first time in more than half a century last month, according to official figures hailed by Chancellor George Osborne as "good news for family budgets".

The Consumer Price Index (CPI) measure of inflation dipped to minus 0.1%, the Office for National Statistics (ONS) said.

It is the lowest level on record and comes after two previous months of zero inflation. Estimates of past CPI rates suggest it was last negative, at minus 0.6%, when Harold Macmillan was prime minister and Dwight Eisenhower was US president.

The latest figure is in line with projections by the Bank of England, and economists broadly expect it to bounce back to a positive number for May rather than heralding a persistent spiral of falling prices.

Bank governor Mark Carney stressed last week that a temporary period of negative CPI should not be mistaken for a damaging episode of "deflation".

But the TUC said it could be the "canary in the mine" signalling that there is something wrong with the recovery.

Sterling fell a cent against the US dollar as the fall in inflation cemented expectations that the Bank will not be raising interest rates until well into next year.

Mr Osborne said: "Today we see good news for family budgets with prices lower than they were a year ago. As the governor of the Bank of England said only last week, we should not mistake this for damaging deflation.

"Instead we should welcome the positive effects that lower food and energy prices bring for households at a time when wages are rising strongly, unemployment is falling and the economy is growing.

"Of course, we have to remain vigilant to deflationary risks and our system is well equipped to deal with them, should they arise."

The Bank of England said last week that it expected inflation to fall below zero before picking up "notably" towards the end of the year as the effect of lower oil and food prices fades.

A more persistent sequence of dropping prices might have unwelcome consequences, such as households and businesses putting off spending and investment.

Mr Carney has said the Bank could cut interest rates to stave off this threat though he has played down the possibility of having to use this tool.

Inflation has been dragged lower by the supermarket price war and falling oil prices.

But today's figures showed "core" inflation, excluding the volatile effects of energy, food, alcohol and tobacco, was also subdued. At 0.8% in April, it was at its lowest level since March 2001.

Food prices fell 3% year on year in April, the fourth month of deflation at around that level - an unprecedented run of prices falling at such a pace in the sector.

Fuel prices rose on the month, with a litre of petrol 2p more expensive than in March, meaning its downward pull on the year-on-year rate was smaller than before.

But the timing of Easter dragged down on CPI as air and sea fare rises in April were much lower than in the same month last year.

Markit chief economist Chris Williamson said: "Deflation has hit the UK, but looks unlikely to stay for long.

"The ongoing lack of inflation is a boon for consumers, acting as a welcome surrogate for wage growth which, although showing signs of rising, remains subdued.

"Alongside falling unemployment, low prices, especially for fuel, have boosted consumer spending, which is consequently providing the main thrust to economic growth at the moment.

"Further weak inflation numbers are to be expected in coming months, but any dip into deflation is likely to be short-lived, and the UK shows few signs of sinking into a Japanese-style deflationary slump."

Rain Newton-Smith, CBI director of economics, said: "With inflation set to remain below 1% this year, a rise in interest rates any time soon seems off the cards."

James Sproule, chief economist at the Institute of Directors, said: "Deflation can be a chronic problem where it represents a lack of consumer confidence and an unwillingness to spend.

"This danger is very real in some parts of southern Europe, but is not even a distant threat in the UK.

"While deflation does cause the cost of debt to rise in real terms, the benefits to the wider economy of a period of falling prices far outweigh any downsides."

But TUC general secretary Frances O'Grady said: "The first period of negative inflation in over half a century could turn out to be the canary in the mine, signalling that there's something very wrong with the recovery.

"And with the threat of deflation set to continue, the Chancellor's plans for extreme cuts risk putting the economy into more serious trouble."

Shadow chancellor Chris Leslie said: "Any relief for households is welcome, but this month's figures reflect global trends and doesn't change the reality that many are still struggling to pay the bills."

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