Another month of deflation

published 19 November 2015

The annual rate of consumer price inflation (CPI) held steady at -0.1% in October, the lowest since 1960. Lower food and alcohol prices, and the effects of higher tuition fees dropping out of the annual calculation, offset the strongest October rise in clothing prices since 1997. According to Citigroup's Michael Saunders, Britain is on track for its lowest annual inflation rate since 1933 this year: 0.1%. Core inflation, which strips out volatile food and energy prices, ticked up to 1.1% last month. Producer price inflation stood at -1.3%.

What the commentators said

The main reason for this bout of deflation is collapsing commodityprices, abetted by the recent strengthin the pound, rather than a lack of domestic economic momentum that becomes self-perpetuating. For instance, there is no evidence of changing consumer behaviour. "No one is goingto delay their weekly trip to the supermarket or stop filling up their car's petrol tank because they expect prices to fall next month," said Currie. "You need to eat and get to work."

Indeed, this is a bout of "good deflation", raising households' spending power. Consumers are "enjoying real-terms wage rises after years of pain", said Russell Lynch in The Independent. Wage growth near a six-year high, low unemployment and a healthy housing market all bode well for consumption, which comprises 60% of GDP.

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In any case, inflation is likely to rise again soon, as the recent oil pricedeclines drop out of the annualfigures. According to Bank of America Merrill Lynch's Rob Wood, petrol price inflation is set to climb from -14% to 0% by February.

Meanwhile, negative producer price inflation is unlikelyto be enough to prevent core inflation climbing next year, said SamuelTombs of Pantheon Macroeconomics: retailers are raising prices to make up for big increases in labour costs. CPI could thus reach the Bank of England's 2% target by late 2016, "compelling" it to raise interest rates faster than the markets expect.

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.