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UK on brink of negative inflation

Britain is on the brink of negative inflation for the first time in half a century after figures showed the rise in the cost of living fell to zero last month.

The figures were welcomed by Chancellor George Osborne as "good news for family budgets", presenting the coalition with a pre-election boost.

February's data from the Office for National Statistics (ONS) showed the Consumer Price Index (CPI) measure of inflation fell more steeply than expected to an all-time low of 0%, down from 0.3% in January.

It is expected to fall further into negative territory in coming months as recently-announced gas price tariff cuts feed through to households.

CPI has been dragged lower by falling oil prices reducing petrol costs and the supermarket price war bringing down food prices.

The slide in inflation bolstered expectations that any hike in interest rates - which have been held at 0.5% for six years - is still a long way off, sending the pound lower.

It is a new record low for CPI since comparable records began in 1989. An experimental model created by the ONS indicates that the last time it was lower was in March 1960 at minus 0.6%.

Coalition politicians will be hoping the boost to spending power from low inflation creates a feel-good factor ahead of May's general election.

Mr Osborne said on Twitter: "Inflation at zero is a first for the British economy. Low inflation due to falling oil prices is good news for family budgets."

He claimed that with prices frozen and the economic recovery in train, Labour's economic argument had "come to nought".

But shadow Treasury minister Cathy Jamieson pointed out that it was external factors that had brought down inflation, adding that wage growth in the UK remained sluggish.

She said: "A few months of falling world oil prices won't solve the deep-seated problems in our economy."

The likely timing of an interest rate hike had already been pushed back by many experts to 2016 but today's sharper than expected fall will give added weight to expectations that it will be later rather than sooner.

It comes after a speech last week by Bank of England chief economist Andy Haldane saying that the next move on rates was as likely to be a cut as a hike.

Bank governor Mark Carney has already said that a cut would be an option should low inflation persist longer than expected but still expects the next move to be an increase.

Low inflation benefits consumers because it means wages go further, but policy makers fear a prolonged period of negative CPI could have damaging effects.

That is because persistent falling prices might cause consumers to delay spending and firms to put back investment. At the same time, debt repayments such as mortgages would become more expensive in real terms.

This would threaten what Mr Carney has described as a "clear and present danger" for the UK's indebted households and businesses.

He warned in a speech this month of the need to be " vigilant" against the risk that low inflation slips in to the kind of spiral of falling prices behind the Great Depression in the 1930s.

The Bank must to try to return CPI towards 2% and Mr Carney was obliged to write a letter of explanation to Chancellor George Osborne earlier this year when it fell more than 1% off this target.

Vicky Redwood, chief UK economist at Capital Economics, said: "The UK is now within a whisker of deflation.

"It looks odds-on that inflation will turn negative in March, when the cut in gas prices by British Gas (the utility company with the biggest market share) will show up in the inflation figures for the first time.

"And inflation is then likely to remain around zero/slightly negative for the rest of the year. But we doubt that this will turn into more serious and engrained deflation."

Chris Williamson, chief economist at Markit, said: "Rather than being a concern, the drop in inflation is a boon to the economy, providing households with greater spending power at a time when pay growth remains frustratingly weak."

Investec's Philip Shaw said the CPI data was lower than forecast, he expected inflation not to dip into negative territory now.

"The principal reason for this is that petrol prices have recovered in recent weeks and look set to become a modest upside influence to the inflation profile during the coming months.

"In any case, a possible two or three months of inflation in negative territory does not constitute deflation in the strict sense, since this cannot in any shape or form be considered a 'sustained' fall in prices."

Prime Minister David Cameron said: "It is good news that inflation is 0% today. You listen to the Bank of England and they are not saying that we face the dangerous deflation that some other parts of Europe may potentially have a problem with."

TUC general secretary Frances O'Grady said: "Zero inflation is a reminder of how fragile the economy remains. Stagnating prices are not a sound foundation for the strong and sustained pay rises that workers have waited so long for."

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