Britain dips back into deflation

Deflation returned to Britain last month, the second time since April that prices fell year-on-year.

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Falling prices put more money in our pockets

Deflation returned to Britain last month, the second time since April that prices fell year-on-year. The annual rate of consumer price inflation (CPI) slid to -0.1% from 0% the month before,thanks largely to lower petrol prices. Core inflation, which strips out volatile food and energy prices, held steady at 1%. Before April, prices had not fallen on an annual basis since 1960.

Meanwhile, the unemployment rate slid to 5.4%, a new post-crisis low. In the three months to August employment rose by 140,000, lifting the number of people in work to 31.1 million, the highest since records began in 1971.

What the commentators said

The benign version stems from falling energy and food prices, which give households a boost and help boost demand. And this, luckily, is the one we're seeing now. Lower prices are putting more money in people's pockets, especially because they are being accompanied by strong wage growth as the labour market tightens. Pay growth excluding bonuses has eased slightly from last month's six-year high of 2.9%; with bonuses, it is expanding by 3% a year.

The "substantial increases in real household earnings [are] supporting consumer confidence and should help boost consumer spending growth", said ING's James Knightley. Consumption accounts for around 60% of GDP. Given the solid outlook for demand, pay and growth, "market expectations of the first Bank of England rate rise being more than a year away seems too cautious".

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