UK inflation falls to zero

24th March 2015

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UK inflation rate fell to 0% in February, the lowest since records began, official figures show.

Price movements in recreational goods and food, furniture and furnishings helped to cut the rate from 0.3% in January, official figures show.

February’s figure is the lowest rate of Consumer Prices Index (CPI) inflation since estimates of the measure began in 1988.

The Office for National Statistics says that a basket of goods and services that cost £100.00 in February 2014 would have still cost £100.00 in February 2015.

The rate of Retail Prices Index (RPI) inflation fell to 1% from 1.1%.

The drop in the CPI measure was sharper than many analysts had expected, with most expecting a rate of 0.1%

Rain Newton-Smith, director of economics at business lobby group the CBI, said: “Despite inflation dropping to zero, it is unlikely we will see falling prices for a prolonged period, particularly as the pressure from lower oil prices fades.

“With the Monetary Policy Committee still alert to the risk of very low inflation becoming entrenched, a rise in interest rates anytime soon seems off the cards.”

The ONS says that while some prices (such as for motor fuels and food) are lower than they were a year ago, others (such as for clothing and rents) are higher. Prices of motor fuels and food have now fallen or remained unchanged on the year for 18 and 10 consecutive months respectively and in February, the 12-month rates for both groups were the lowest on record. Taken together, motor fuels and food price changes reduced the CPI 12-month rate by approximately 0.9 percentage points in the year to February.

It adds that the slowdown in the 12-month rate between January and February came from price movements for a range of recreational goods particularly including data processing equipment, books and games, toys and hobbies, food and furniture and furnishings.

Interest rates will rise not rise till mid 2016

Hargreaves Lansdown senior economist Ben Brettell says: “The majority of the fall in inflation can be explained by falling motor fuel prices (which fell 16.6% in the year to February) and food prices (a 3.4% fall), along with the appreciation of sterling. These effects should prove temporary and drop out of the rolling twelve-month calculations in due course. For this reason the Bank’s governor Mark Carney believes Britain is not heading for a dangerous ‘Japan-style’ deflationary spiral, and argues cutting interest rates in response would be foolish.

“However, the minutes also noted that weak growth in domestic costs had played a part in the fall in inflation, and cast doubts over whether wages are rising quickly enough to return inflation to target. This has prompted the Bank’s chief economist, Andy Haldane to warn that his fellow policymakers may be underestimating the risk of deflation.

“I believe a cut in interest rates looks most unlikely, but with inflation at zero and deflation looming it is almost impossible to see them rising either. It therefore appears interest rates will be stuck at 0.5% for some time yet – I don’t see them rising until mid-2016 at the very earliest.”

Good  news for the state pension

Vince Smith Hughes, retirement expert at Prudential, says: “The new inflation low of 0% is good news for most households but particularly good news for pensioners, who typically spend more of their income on food and energy meaning often see proportionately higher rates of inflation than people of working age.

“The State Pension will increase by 2.5% in April, meaning many less well-off pensioners will be seeing significant real-term increases to their incomes.”

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