Inflation drops to zero

Britain is on the cusp of deflation after prices failed to rise over the last year.

735-UK-inflation

The Retail Price Index (RPI), which includes housing costs, is still above zero and last dipped into deflation in 2009 (see chart above). Lower food and petrol prices were behind the decline: they have fallen by 3.4% and 17% respectively over the past 12 months. Core inflation (which strips out food and energy prices) also weakened, from 1.4% to 1.2%.

What the commentators said

Some economists worry that deflation could become entrenched, leading to a Japan-style slump with sliding prices, wages and demand. "We should expect policymakers totake drastic action to prevent deflation taking root," said Fexco's David Lamb. "This is a code red moment."

But there's "no need... for a kneejerk reaction", said Andrew Clark in The Times. Wages are set to pick up, people's expectations of inflation look healthy and there's no evidence of stagnation. This suggests core inflation is unlikely to melt away.

The classic worry when it comes to deflation is that people put off major purchases because they expect things to get cheaper, undermining demand, said Fraser Nelson on spectator.co.uk. But so far there is "zero evidence of this happening".

Indeed, as Citigroup points out, "the opposite is the case". Lower prices are encouraging spending. In February the share of people who thought it was a good time to make a major purchase rose to an eight-year high. The proportion of those who thought the next year could be good to do so is at a 12-year high.

What we have here is a "good form of deflation in which lower global food and energy prices provide a much needed boost to household real income levels", said PricewaterhouseCoopers'John Hawksworth. So "let's exhale, rather than panic", concluded Clark, "and enjoy a rare interlude of value in our shopping trolleys".

Recommended

What does Rishi Sunak have in store for investors this Wednesday?
Budget

What does Rishi Sunak have in store for investors this Wednesday?

Rishi Sunak is unveiling his spending plans for the economy this week. John Stepek analyses areas which may be most hit by the budget.
25 Oct 2021
Why we should scrap the Budget
Budget

Why we should scrap the Budget

The yearly Budget, big set-piece of British politics, encourages the very worst from the government, says Matthew Lynn.
24 Oct 2021
Why fed-up workers are quitting their jobs
Economy

Why fed-up workers are quitting their jobs

Workers are leaving their jobs at an astonishing rate, especially in the US, leading to a shortage of workers. What will that mean for our economies? …
22 Oct 2021
Will the government’s green plans hit the price of your home?
House prices

Will the government’s green plans hit the price of your home?

UK house prices are still rising fast. But the government’s plan to reach net-zero carbon emissions could halt that – for some of us, at least. John S…
21 Oct 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021