Annual inflation drops back to zero per cent as the price of clothing and foods falls

ANNUAL UK inflation dropped to zero in June as clothing and food prices fell, official figures have shown.

The UK had scraped its way out of deflationary territory in May, with annual consumer prices index (CPI) inflation of 0.1 per cent. In April, the UK had suffered annual deflation on the CPI measure for the first time since 1960. The Treasury has set the Bank of England a target of two per cent for annual CPI inflation.

In spite of news of the fall in inflation to zero in June, the pound rose as Bank of England Governor Mark Carney said the point at which UK base rates began to normalise was “getting closer”. UK base rates have been at a record low of 0.5 per cent since March 2009.

Economists had forecast annual CPI inflation would be zero in June.

The pound was trading around $1.5583 at 5pm, up nearly 0.7 cents on its close in London on Monday.

Sterling also made ground against the euro. The single currency was trading around 70.67p at 5pm, down nearly 0.4p on its Monday close.

The ONS said that clothing and footwear prices fell by 0.4 per cent between May and June, in contrast to a rise of 0.6 per cent at the same time last year. Prices in the food and non-alcoholic beverages category fell by 0.2 per cent between May and June, having risen by 0.1 per cent between the same two months of 2014.

Howard Archer, chief UK economist at consultancy IHS Global Insight, said: “Despite flat inflation in June, it remains highly unlikely that c on s u mer s will delay purchases in expectation of falling prices.

“Consumer price inflation is likely to hover around zero through the summer and then start heading up decisively from around September. Nevertheless, the rise in consumer price inflation should be relatively gradual and we see it only reaching one per cent by the end of 2015 and 1.9 per cent by the end of 2016.”

Mr Archer doubted deflation would recur in the UK, but said this could not be ruled out if oil prices were to “fall markedly anew”.

He believed firmer oil prices, a pick-up in earnings growth and a reduction in excess capacity in the economy would help push annual inflation up from around September.