Britain on the brink of deflation
…for the first time since 1960
BRITAIN is on the brink of its first period of falling prices for more than half a century.
The official measure of inflation dropped to zero per cent in February, with Bank of England governor Mark Carney confirming that ‘deflation is on the cards’.
Eagerly-awaited figures to be published tomorrow are widely expected to show inflation dipped into negative territory in March, as the cost of essentials such as food and energy has continued to fall.
If prices do drop it would be the first time since a short spell of deflation in 1960, under Harold Macmillan’s Tory government. Then, the UK had an enormous trade deficit and prices fell 0.6 per cent in a year, partly driven by low oil prices.
But economic research firm Capital Economics predicts inflation, as measured by the Consumer Prices Index (CPI), will fall to -0.1 per cent.
Others say prices will remain frozen at zero per cent or could even rise by 0.1 per cent due to a recent increase in petrol prices. The Tories are hoping that deflation, coupled with rising wages, will fuel a feel-good factor ahead of the General Election.
But falling prices may herald more bad news for savers if the UK’s interest rates are frozen for some time.
The Bank’s chief economist Andy Haldane has even suggested that interest rates could be cut to counter deflation and boost growth, although other officials have stressed the next move in rates is likely to be up.
Ben Brettell, senior economist at pensions and investment firm Hargreaves Lansdown, said: ‘With inflation likely to pick up once the effect of the drop in oil
‘Enjoy it while
you can’
prices falls out of the year- onyear calculation, a cut in rates looks most unlikely.
‘But I don’t see them rising until mid-2016 at the earliest.’
Ultra-low inflation has been driven by the dramatic drop in the price of oil from a peak of $115 a barrel in June to less than $60 a barrel. But petrol prices jumped 3.6 per cent last month, which some think will push up inflation by 0.1 per cent of a percentage point. However, others believe a substantial fall in food prices over the same period could push inflation into negative territory.
Alan Clarke, an economist at Scotiabank, said: ‘It is a close call between a zero and -0.1 per cent year-on-year outcome.’
The Bank of England has said it is ‘more likely than not’ that CPI inflation in Britain will enter into short period of deflation in the spring and remain well below its 2 per cent target for the remainder of the year.
But governor Mark Carney has described the impact of cheaper oil prices as ‘unambiguously good’ for households as lower petrol prices and in the shops ease pressure on finances.
There are also concerns that falling prices will cause the pound to fall further against the US dollar, with sterling crashing to an almost five-year low of $1.465 on Friday.
The fall in sterling was also driven by worries over the out- come of the election on May 7 and disappointing manufacturing and construction figures.
Some economists have raised concerns about the arrival of deflation, as a prolonged period of falling prices can cripple economies by making debts much harder to service.
Deflation can also prompt households to delay spending because they hope to pick up goods or services more cheaply later on.
With oil prices are widely expected to bounce back over the year, pushing up inflation, David Buik, from broker Panmure Gordon, said: ‘The message for households is enjoy it while you can, as inflation is likely to pick up later this year.’