Fall back to zero inflation delays rates rise

THE PROSPECT of an interest rise is now unlikely until well into 2016 after inflation fell to zero in August.

Analysts suggested inflation could dip below zero before the end of the year but insisted there was little prospect of it turning into damaging deflation.

The headline CPI rate of inflation was pulled lower as the price of a litre of diesel fell by 6.2p and petrol by 2.4p, both more sharply than in the same period last year, according to the Office for National Statistics (ONS).

Meanwhile seasonal price rises in fashion and footwear stores were more muted, especially for women’s clothing, also dragging on CPI.

Books were also cheaper, as were “cultural services” such as theatre and nightclub tickets.

Price rises for furniture and soft drinks partially offset the fall, though overall food and nonalcoholic beverages continued the record-breaking run of yearon-year falls.

Martin Beck, senior economic adviser to the EY Item Club, said: “There is still an even chance that we will see the CPI measure turn negative again in the next couple of months.

“The renewed drop in oil prices is steadily feeding through to prices at the pumps while recently announced price cuts for domestic gas bills will hit the index next month.”

He added that even when the effects of sharp falls in the oil price fade, inflation still looks likely to remain below one per cent until next spring.

It would mean the Bank of England’s Monetary Policy Committee still having to write an open letter to the Chancellor explaining why CPI is more than one per cent off its two per cent target.

Mr Beck said: “This would suggest there is little risk of a rate hike until well into 2016.”