Inflation dips back to 0% on falling oil and supermarket prices

15th September 2015


Inflation fell to 0% in August from July’s rate of 0.1%, Office for National Statistics (ONS) data has revealed.

Inflation by the Consumer Prices Index (CPI) measure, fell due to a smaller rise in clothing prices from a year ago and lower fuel prices, according to the ONS.

The Retail Prices Index (RPI) measure of inflation rose to 1.1% from 1% in July, but the CPI has been nearly flat for seven months.

Rock bottom oil prices, which were at their lowest level in nearly seven years this August, and an ongoing price war between the major supermarkets, have prevented inflation from rising.

Andy Scott, economist at HiFX, says: “Consumer price inflation fell back to zero last month as lower energy costs continued to keep price growth a long way off the Bank of England’s 2% target rate. Today’s number is unlikely to change the market’s view that a UK rate hike is unlikely to happen in the next six to nine months, despite the governor maintaining his signal of one around the turn of the year.

“Another signal for delays in a UK rate hike would be a net positive for corporates from a cost of debt servicing point of view, along with its effect on sentiment which will remain underpinned by supportive growth conditions.”

Scott adds: “Some Bank of England members have signalled they’re becoming concerned about the outlook for inflation as the economy is expected to continue to grow at a moderate pace, supported by “solid domestic demand”. However they’re facing a clouded forecast horizon with the price of oil and food both lower, putting downwards pressure on the rate of inflation. There’s also the deflationary impact of a weaker Chinese currency following the central bank’s decision to devalue it last month, with China responsible for production of so many of the world’s goods.

UK wages are growing at an annual rate of 2.5% which is lifting household spending, and supporting those at the Bank of England who would like to see rates rise earlier, says Scott. “In short, there’s no clear winner in the argument for or against raising rates today, and risks to global growth over the next 12 months have increased, making forecasting how the economy will perform in that time all the more difficult,” he says.

“Sterling was largely unchanged following the release which was in line with forecasts. It has fallen by over 2% against both the dollar and the euro after economic data for August showed the economy lost some momentum, leading to scaled back rate hike expectations.

“With the BoE appearing to have lost some credibility, since sterling fails to strengthen on the back of rate hike talk as would usually happen; the economic data will become all the more important over the coming months.”

Maike Currie, associate investment director at Fidelity Personal Investing, says: “[August’s dip in inflation] is largely due to the slump in the oil price, a washed out summer keeping shoppers away from the high street, falling sea fares and the ongoing supermarket price wars. Inflation has now been flat or negative for five out of the past seven months  – a far cry from the Bank of England’s 2% inflation target.”

But she says: “It is important to distinguish between disinflation – a slowdown in the rate of inflation; and deflation – a persistent and ongoing fall in prices. The two are not the same thing.

“Both food and fuel – the main drivers of the historically low inflation numbers we are seeing – are two essential items. No-one is going to delay their weekly trip to the supermarket or stop filling up their car’s petrol tank, because they expect prices may fall next month.

“Deflation is dangerous because it causes companies and consumers to do the exact thing that causes more deflation – delay spending in the hope of further price falls in the future.”

With inflation virtually non-existent, the Bank of England is under even less pressure than the Fed to raise rates, says Currie.  “Sure enough last week’s meeting of the Monetary Policy Committee voted 8-1 against a hike on this side of the pond – pushing UK rate rise expectations as far out as August 2016.”

She adds: “But for now all eyes are on what the Federal Reserve does on Thursday. The Fed’s twin mandate includes price stability and economic growth. With inflation notable for its absence, particularly wage inflation, the price pressures on the Fed are non-existent. As for economic growth, periodic set-backs in recent months show that recovery is more fragile than the Fed might choose on the eve of a new tightening cycle. Meanwhile the summer’s market volatility on the back of China’s slowdown and its spill-over into emerging markets means Janet Yellen will be acutely aware of the risks of pulling the trigger on higher rates too soon.

“The reality is that whatever happens this week, interest rates on both sides of the Atlantic will remain lower for longer. The long slow recovery from the financial crisis will ensure that central banks take no risks.”

Ben Brettell, senior economist at Hargreaves Lansdown, says: “With domestic growth and the labour market recovery looking healthy, if unspectacular, some policymakers are increasingly considering that higher rates are appropriate.

“Rate-setter Martin Weale said last week that rates would have to rise “relatively soon”, and another MPC member Kristin Forbes has also said they will probably rise in the near future. Both voted to leave rates on hold at this month’s meeting, but their rhetoric suggests they might soon join Ian McCafferty in voting for a rise of 25 basis points.

“On balance I believe the Bank will wait until at least next spring before acting.

“Tomorrow sees the release of UK labour market statistics, ahead of the week’s main event  – the US Federal Reserve’s eagerly anticipated interest rate decision on Thursday.”


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