UK slips into deflation for the first time since the sixties

19th May 2015


The UK economy slipped into deflation for the first time since the 1960s, as the consumer price index fell by 0.1% in the year to April.

This was compared to no change in the index for the year to March 2015, according to the Office for National Statistics.

This is the first time the CPI has fallen over the year since official records began in 1996 and the first time since 1960 based on comparable historic estimates.

The largest downward trend was in transport costs, such as air and sea fares and the early timing of Easter this year is thought to be a key factor.

Tom Stevenson, investment director at Fidelity Personal Investing, says:  “Britain has been flirting with deflation for some months now and, for the first time in 55 years, UK inflation has finally dipped into negative territory.  While today’s figure may trigger headlines about us “turning Japanese”, the rebound in oil prices and stability of global food prices means we can expect the dis-inflationary period to be short lived. Households should enjoy the cheaper cost of living and real earnings growth while it lasts. Inflation is expected to pick up towards the end of the year.

“Investors suffering from the paltry returns that low inflation and low interest rates bring should look to the stock market for better returns. Companies that have pricing power through their brand names are safe havens in a disinflationary environment. Funds such as Nick Train’s Lindsell Train UK Equity Fund, Terry Smith’s Fundsmith Equity Fund are good ways to play this theme. Alternatively, equity income provides yield with the prospect of growth as well via funds like Michael Clark’s Fidelity Moneybuilder Dividend Fund.

“Fidelity calculates that if a saver had invested £15,000 into the FTSE All Share index over the 10 year period from 29 April 2005 to 30 April 2015, they would now be left with £33,344.26 If, however, they had invested £15,000 into the average UK savings account over the same period, they would be left with £16,271.25. The safety of cash is an expensive luxury today.”

Is fixed income a vast “misallocation of capital”?

Kevin Doran, chief investment officer at Brown Shipley, says: “Despite today’s inflation numbers showing a fall into negative territory, investors shouldn’t be fooled into thinking this is an accurate representation of the state of inflation in the UK. You don’t have to look far to see that there is an abundance of inflation in asset prices, largely in bond and equity markets, with people rightly talking about bubbles in each of these respective asset classes, particularly tech stocks.

“Furthermore, contrary to the story today’s figures may tell, I see inflation as the dog that hasn’t barked, yet. In my view, it’s a misconception to think that inflation will stay low for the foreseeable future and that we’re going to experience anything similar to prolonged Japanese-style deflation. It’s inevitable that with asset price inflation at such levels, that this will filter into real world inflation – critically however, I don’t see markets pricing this rise in inflation and the associated risks appropriately. For example, with naïve inflation projections and negative real yields, fixed income is an asset class to avoid. In fact, in my view it is arguable that fixed income markets represent one of the greatest misallocations of capital in the history of man.

“Ultimately, until the models used to measure inflation capture real world inflation and asset price inflation, the figures produced each month will at best only tell half the story and at worst distort the truth.”

No need to panic”

Howard Archer, chief UK and European economist at IHS Global Insight, says: “There is little to worry about from the UK’s dip into mild deflation in April; it should primarily have a beneficial impact on the economy through further boosting consumers’ purchasing power. Consumer’s purchasing power is being boosted appreciably with consumer prices edging down 0.1% year-on-year in April having been flat in the previous two months. This compares with annual earnings growth (1.9% in the three months to March and 3.3% on March itself).

“Furthermore, deflation is likely to prove brief and marginal and it is highly unlikely that consumers will be tempted to start delaying purchases in anticipation of falling prices.  Indeed, inflation expectations have recently shown overall signs of stabilization after softening and there is no evidence that consumers expect prolonged falling prices.

“The UK’s actual dip into deflation in April was significantly influenced by the earlier Easter this year as air and sea prices fell back in April after a spike in March.

“We suspect the UK could well exit deflation as soon as May, and we expect inflation to then hover around zero before starting to trend up gradually from the third quarter.  This should be the consequence of base effects becoming less favorable, firmer oil prices overall, earnings growth picking up, and excess capacity in the economy diminishing. Nevertheless, inflation is still only seen reaching 1.0% by the end of 2015 and 1.9% by the end of 2016.

“Deflation of  0.1% in April reinforces belief that the Bank of England will most likely hold off from raising interest rates until the second quarter of 2016. This was the impression given by the forecasts and analysis contained in the Bank of England’s Quarterly Inflation Report for May, and April’s deflation of 0.1% ties in with what the bank was expecting. The Bank expected the UK to see a brief period of mild deflation and it forecast inflation to average 0.0% in the second quarter.”

What it means for savers

Today, all 859 savings accounts on the market beat inflation, and of these, 666 (149 no notice, 78 notice, 231 fixed rate bonds and 208 ISAs) are without restrictive criteria, according to, the comparison site.

The effect of inflation on savings means that £10,000 invested five years ago, allowing for average interest and tax at 20%, would have the spending power of just £8,684 today – a fall of 13.16%.

Charlotte Nelson, finance expert at, says: “While the low inflation rate is still being celebrated by those who can see their cash going further, savers looking to supplement their income are struggling with not only a lack of choice but abysmal savings rates.

“The withdrawal of the NS&I Pensioner Bonds sees the only decent rates removed from the market. We knew they weren’t going to be around forever, but there is little else left for savers who are wrestling to get good deal.

“A staggering 138 savings accounts on the market pay 0.5% or less, but consumers can easily get over twice this amount on a best buy easy access account.

“The best fixed rate deal today pays 3.53% for five years; however, just five years ago you could open an easy access account paying 3.00%.

“Savers now need to shop around to chase down decent accounts and act fast when they find them. Good deals can get oversubscribed really quickly, so it pays to act before the deal is reduced or withdrawn completely.”


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