Further fall in inflation expected

Published: Tuesday 24th March 2015 by The News Editor

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Inflation is expected to have dropped closer to zero when official figures for February are published today.

The Consumer Price Index (CPI) measure of inflation fell to 0.3% in January – its lowest level since records began in 1989 – and is forecast to have slipped further to around 0.2% last month.

CPI is then expected to continue to fall, resulting in negative inflation for the first time in half a century, before remaining close to zero for much of the rest of the year.

It has been reduced by falling oil prices driving down the price of petrol as well as the supermarket price war.

A steeper or faster than expected fall in CPI is likely to push back expectations of when interest rates – held at 0.5% for the last six years – will rise or even whether they will be cut further.

It would put further downward pressure on the pound, which is trading close to near-five year lows against the US dollar, after Bank of England chief economist Andy Haldane said last week that rates were as likely to fall as to rise.

But the prospect of interest rates being lower for longer has buoyed stock markets, helping the FTSE 100 Index to surpass 7,000 points for the first time last week.

The Bank of England targets CPI at 2% and governor Mark Carney had to write to Chancellor George Osborne when figures showed it slid to 0.5%, more than 1% away from the target, in December.

Low inflation boosts household spending power with any wage rise being worth more in real terms. The fall to 0.3% for January was hailed as a milestone by Mr Osborne. But there are warnings of unwelcome consequences if it is too low for too long.

Mr Carney has spoken of the need to guard against the “clear and present danger” that a sustained period of negative inflation would create for the UK’s indebted households and businesses.

The governor has previously talked up the positive effect of low inflation boosting consumer spending – though signalling that interest rates could be cut further should it persist longer than expected.

In a speech earlier this month he said there was no evidence of a spiral of low prices in which consumers delay purchases and firms delay investment.

But he warned of the risk of prolonged deflation making household debts such as mortgages relatively more expensive as other prices and possibly wages fall

He said that if factors weighing down inflation such as the strength of the pound were to increase, the path of interest rates may need to change – hinting that they could rise more slowly or even be cut.

Expectations for a first hike from 0.5% have already been pushed back into 2016.

CPI inflation has never been as low as its latest reading since records by the Office for National Statistics (ONS) began in 1989. According to an experimental model created by the ONS last year, CPI would have last been lower, at minus 0.6%, in March 1960.

Economists at Investec expect a dip to 0.1% for February as some of the recently-announced household gas price cuts feed into the figures.

Scotiabank’s Alan Clarke pointed to the path of price hikes on new season clothes and household goods following January discounts as a key factor.

He said: “There is a risk that CPI inflation hits zero or negative this month. This would be a big market mover.

“While we expect to hit zero on inflation, it is more likely to happen in April or June given the swings in Easter airfare prices.”

Published: Tuesday 24th March 2015 by The News Editor

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