ZERO INFLATION
Rate at lowest level for 55 years … but it raises spectre of deflation
INTEREST rates are unlikely to rise until the middle of next year as the Bank of England tries to stave off a deflationary spiral, economists said last night.
Official figures revealed the inflation rate fell to 0 per cent last month – the lowest level since 1960.
Experts warned Britain is now just one month away from deflation as food and petrol prices continue to tumble.
The dramatic fall in the cost of goods is likely to push back the timing of an interest rates hike by the Bank of England.
Delaying a rates rise would mean continued rock-bottom interest rates for mortgage borrowers, but more misery for savers.
The base rate has been held at an historic low 0.5 per cent for six years but the Bank of England has admitted that, far from raising rates, it could even cut them further to avoid prolonged deflation.
Lower rates would encourage people to spend, rather than save, stimulating demand and pushing up prices.
Ben Brettell, senior economist at stockbrokers Hargreaves Lansdown, said: ‘It appears interest rates will be stuck at 0.5 per cent for some time yet – I don’t see them rising until mid-2016 at the very earliest.
‘The Bank raises rates to curb inflation, but that is obviously not a problem at the moment, so they will keep them on hold.’
John Hawksworth, of PricewaterhouseCoopers, said the Bank was now ‘under no immediate pressure to raise interest rates’.
Andrew Haldane, the Bank’s chief economist, suggested earlier this month that rates could be cut to zero because inflation had ‘dropped like a stone’.
Low inflation, and even deflation, over a short period can be good for the economy and boost family finances, but a continuous fall in prices is harmful.
Bargain prices in shops could be used by employers as an excuse to keep wages low, while workers could delay big purchases in anticipation that costs will fall further – triggering a downward spiral.
Yesterday, Prime Minister David Cameron seemed unconcerned by predictions that prices would fall further, saying Britain did not ‘face the dangerous deflation that some other parts of Europe may potentially have a problem with’.
He welcomed the lowest inflation rate in 55 years, saying it was ‘good news for family budgets’, while Chancellor George Osborne declared that ‘prices are frozen’.
Estimates released by the Office for National Statistics show the last time inflation was below 0 per cent was March 1960 – when Harold Macmillan was Prime Minister and The Beatles had just formed in Liverpool.
The last major bout of deflation came during the Great Depres- sion from 1929 to 1932. It did not end until Britain abandoned the gold standard which the then Chancellor Winston Churchill embraced in 1925.
Before that, in the late 19th century the prices of goods, property and shares fell sharply provoking a banking crisis similar in scale and danger as that of 2007 to 2009.
In the early 18th century the value of the pound was fixed against gold and prices were flat and falling until the outbreak of the Napoleonic Wars.
Inflation measures the rise and fall of 700 goods and services, from energy prices to clothing.
But it is the plummeting cost of petrol, diesel and food that has dragged down the rate to just 0 per cent. In the last year, there has been a huge fall in the cost of global wholesale oil, causing prices at the pump to tumble by almost 17 per cent.
An aggressive supermarket price war has also dragged down the inflation rate, as major stores have been forced to compete with budget rivals such as Aldi and Lidl.
The ONS reported that food prices had fallen by more than 3 per cent in February compared with a year earlier.
Economist Vicky Redwood, 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 recent cut in gas prices by British Gas show up in the inflation figures for the first time. We still think that deflation in the UK will be a “good” development, giving households’ incomes a welcome boost and supporting the economic recovery this year.’
Rob Wood, of Berenberg Bank, said there was ‘a good chance inflation could turn negative next month’.
Economist Chris Williamson, 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.’
Chief Secretary to the Treasury Danny Alexander said that, as pay rises pull ahead of price i ncreases, people had more money in their pockets, helping ‘millions of families’.
But Shadow Treasury minister Cathy Jamieson said it was external factors that had brought down inflation, rather than the Government’s economic policy.
She said: ‘A few months of falling world oil prices won’t solve the deep- seated problems in our economy.’
‘Within a whisker
of deflation’