Inflation drops back to 0%

14th July 2015


Inflation has dropped back to 0% in June, after one month in positive territory.

The Consumer Prices Index reached 0.1% in May after dipping briefly into deflation when the index dropped to -0.1% in April.

The latest downward movement in inflation has been attributed to lower food and clothing prices, as well as a smaller rise in air fares than last June.

Ben Brettell, senior economist at Hargreaves Lansdown, says: “Inflation is back to square zero as the supermarket price war and summer clothes sales continue to weigh on prices.

“There is clear daylight between wage growth and inflation, putting more money in the pocket of consumers, who have faced tight household budgets since the financial crisis took hold.

He adds:  “Zero inflation combined with wage growth running at 2.7% should boost consumer spending, and this should in turn be good news for economic growth, which I expect to pick up during the second half of the year.

“The Bank of England’s Monetary Policy Committee have thus far been relaxed about the current bout of ‘lowflation’, forecasting that inflation will soon rebound, especially once 2014’s fall in fuel costs drops out of the calculation.”

Brettell points out that core inflation, which strips out volatile components such as food and energy prices, which fell to 0.8%.

He notes that this is the lowest reading since 2001, and shows that underlying inflationary pressures in the economy remain weak, perhaps due to the lower oil price feeding through to lower prices for other goods and services.

Consequently, he argues, there is still no real pressure on policymakers to raise interest rates in the short term, with the first rise pencilled in for the first half of next year at the earliest. International concerns will also be at the forefront of policymakers’ minds, not least the ongoing saga in the euro zone, he adds.

New labour market statistics tomorrow will put today’s inflation figures into a wider economic context.

Brettell says: “Unemployment is once again expected to hold steady at 5.5%, but average wage growth (excluding bonuses) is expected to jump from 2.7% to 2.9%. Including bonuses the jump is forecast to be even larger – to 3.3%. The Bank of England will need to judge whether higher wage growth will eventually feed through to higher price inflation, and if so, how soon and to what extent. This will be the key judgement in deciding when higher interest rates might be appropriate.”

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