UK heading for negative inflation, Bank of England expected to warn

Mark Carney

Britain will slip into deflation for the first time in more than half a century, the Bank of England is expected to say on Thursday, as the slump in oil prices further impacts the economy.

Inflation fell to 0.5% in December and is expected to turn negative in the coming months as a result of falling petrol and food prices.

The Bank is expected to cut its inflation forecasts in its latest quarterly inflation report to reflect a period of deflation.

The last time inflation was negative in Britain was March 1960, according to the closest comparable data from the Office for National Statistics (ONS).

The Bank’s governor, Mark Carney, is likely to stress that negative inflation in the UK will not lead to the dangerous deflationary spiral feared in the eurozone, where consumers and businesses put off spending because they expect prices to fall further. The single currency bloc is already in deflation, with inflation sliding to -0.6% in January.

Carney is expected to say that falling prices in Britain reflect external factors, such as lower global commodity prices, particularly oil. Brent crude oil has fallen by more than half since last summer, from $115 a barrel to just over $55 a barrel on Thursday morning. Lower oil prices are reflected at UK petrol pumps, with motorists enjoying cheaper fuel.

Kathleen Brooks, the research director at Forex.com, said: “There is a chance that the Bank’s inflation [forecast] chart could even dip into negative territory, however the Bank may be at pains to state that any period of deflation would be temporary and benign and not have a long-term impact on the UK economy.”

UK inflation has also been pulled lower by the intense price war among supermarkets, which are battling for customers in a time of changing shopping habits.

Data to be published by the ONS next Tuesday is expected to show that inflation fell further in January, to just above zero.

Last month Carney was forced to write a letter to the chancellor, George Osborne, explaining why inflation was more than one point below the Bank’s 2% target in December. The exchange of letters will be published at 10.30am on Thursday, the same time as the February inflation report.

Carney and his colleagues on the rate-setting monetary policy committee (MPC) will have to balance the prospect of deflation with a brighter economic backdrop when deciding the best time to raise interest rates. Rates have been on hold at an all-time low of 0.5% since March 2009.

Many economists believe rates will be left on hold until 2016, as inflation remains weak. The minutes of the MPC’s January meeting revealed that Martin Weale and Ian McCafferty dropped their call for a rate rise. The two members of the nine-strong committee had previously voted for a 0.25% hike every month since August 2014.

Powered by Guardian.co.ukThis article was written by Angela Monaghan, for theguardian.com on Thursday 12th February 2015 09.25 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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