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.
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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".
Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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