UK inflation hits zero for the first time on record

Mark Carney

Inflation has fallen to zero for the first time on record after falling food and petrol prices boosted consumer pockets.

The consumer prices index fell to zero in February from 0.3% in January, moving the UK closer to a spell of deflation that is expected in the coming months.

Economists had forecast a smaller drop to 0.1%.

Fuel prices slumped by 16.6% over the year, while food prices were down 3.4% according to the Office for National Statistics, weighing on headline inflation.

The consumer prices index - Britain’s official inflation measure - has never been so low since comparable records began in 1989. However, unofficial estimates suggest it might have been lower in 1960.

The country is forecast to see overall price falls in the spring as the global oil price slump continues to feed through to lower prices at the petrol pump and some utility bills fall. A lower oil price also cuts costs for manufacturers and food producers.

The strength of the pound against the euro, the UK’s main trading partner, makes imports cheaper and could also bring down inflation in the coming months.

Inflation was last close to the Bank of England’s 2% target last June, when it registered 1.9%.

Vicky Redwood, chief UK economist at Capital Economics, said the latest figures showed UK inflation was “dead”.

She added: “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 will show up in the inflation figures for the first time.”

“Inflation is then likely to remain around zero/slightly negative for the rest of the year.”

The latest spell of weak price pressures in the UK has triggered a division of opinion at the very top of the Bank of England, whose remit is to target inflation of 2%.

Mark Carney, the Bank’s governor, has argued that while inflation is likely to turn negative during spring, Britain is not heading for the dangerous deflationary spiral feared in the eurozone.

Deflation can become entrenched and difficult to escape once businesses and consumers delay spending plans because they expect prices to fall further still.

However, the Bank’s chief economist Andy Haldane said last week that in his view, policymakers could be underestimating the threat of UK deflation. As a result of inflation “dropping like a stone”, he said it could prove necessary for interest rates - already at an all-time low of 0.5% - to be cut further.

Carney on the other hand has argued that responding to the recent fall in inflation with a rate cut would be “extremely foolish”.

It suggests that the Bank’s nine-strong rate-setting Monetary Policy Committee is becoming ever more divided on the appropriate timing of the first rise in interest rates, on hold at their historic low since March 2009.

As recently as December, two members of the MPC - Martin Weale and Ian McCafferty voted for a 0.25 point rate hike, before dropping the call in January and at subsequent meetings.

In China, expectations are mounting that the central bank will pump more stimulus into the economy after the latest signs of a slowdown.
Activity in China’s factories was the slowest in 11 months in March as new orders fell. The HSBC/Markit China manufacturing PMI dropped to 49.2 from 50.7 in February, where anything below 50 indicates contraction.
It was weaker than expected, with economists polled by Reuters forecasting 50.6 for the PMI.

Powered by Guardian.co.ukThis article was written by Angela Monaghan, for theguardian.com on Tuesday 24th March 2015 10.05 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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