UK records deflation for first time since 1960

OfficeForNatStatsThe UK Consumer Prices Index has fallen year-on-year for first time since official records began in 1996 and marking the first year-on-year fall since 1960.

According to latest Office for National Statistics data, the CPI fell by 0.1 per cent in the year to April 2015, compared to no change in the year to March 2015.

However, CPIH grew by 0.2 per cent in the year to April 2015.

Transport services made the greatest contribution to the CPI fall, with the timing of Easter “a likely factor”, and the biggest contribution to the fall coming from a drop in air and sea fares.

The latest inflation figures show that transport costs were nearly 0.5 per cent lower in April than the same time a year ago, while food was 0.32 per cent cheaper.

The news comes after the Bank of England had previously warned that inflation could turn negative for a brief period this year.

George Osborne
George Osborne

Reacting to the news, Chancellor George Osborne said the fall in the inflation rate was only temporary.

He said: “Today we see good news for family budgets with prices lower than they were a year ago. As the Governor of the Bank of England said only last week, we should not mistake this for damaging deflation.

“Instead we should welcome the positive effects that lower food and energy prices bring for households at a time when wages are rising strongly, unemployment is falling and the economy is growing. Of course, we have to remain vigilant to deflationary risks and our system is well equipped to deal with them should they arise.”

Meanwhile, inflation as measured by the Retail Prices Index (RPI) in April remained unchanged from the month before at 0.9 per cent.

The last time CPI inflation was negative, according to ONS estimates, was March 1960, when prices were 0.6 per cent lower.

Liz Cameron, director and chief executive of Scottish Chambers of Commerce, said: “Last month we described the opportunity to contribute to economic growth presented by zero inflation, the latest release indicates that the UK has now entered a period of deflation.

“UK consumers are now benefiting from a declining overall price level, and in particular, lower costs for transport services – a result of sustained declining oil prices. This is good news for the economy as a whole - increasing the real disposable income of consumers, but deflation is also a sign that consumer spending in the UK needs to be further stimulated.

“It should also be remembered that deflation is bad news for debt holders, increasing the real value of their debt while the general price level falls.

“Although forecasters expect inflation to move back into positive territory in the coming months, the need to maintain interest rates at the 0.5 per cent base rate while UK inflation remains well below its 2 per cent target, is as crucial as ever to enable businesses to grow.”

Brown Shipley chief investment officer Kevin Doran said: “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.”

Fidelity Personal Investing investment director Tom Stevenson said: “Britain has been flirting with  deflation for some months now.”

He added: “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.”

Ian Stewart, chief economist at Deloitte, said the fall was “likely to prove short-lived and positive for growth”.

“Falling prices raise consumer spending power and help keep interest rates low. This looks like the mild and benign variety of deflation, which is good news for consumers and for growth,” he said.

Andrew Sentance, senior economic adviser at PricewaterhouseCoopers and a former member of the Bank of England’s Monetary Policy Committee, said he did not expect the fall in prices to be sustained.

“Once the impact of the big drop in oil prices drops out of the annual inflation rate, it will move back up to 1-2 per cent over the next year or so.

“With wage inflation picking up, we may soon be considering the prospect of above-target inflation,” he said.

“In the meantime, flat or slightly falling consumer prices are good for growth, boosting real consumer spending power. So a temporary period of slightly negative inflation can be good for the UK economy.”